Local businesses sacrifice profit margins, cut more jobs in May

Domestic businesses put their profit margins on the line to hold on to existing customers as the Covid-19 pandemic continued to weigh hard on local enterprises across May.

Data from the monthly published Purchasing Managers Index (PMI) by Stanbic Bank/HIS Markit shows the headline index remained depressed at 36.7 points in spite of a slight improvement from 34.8 points in April.

Output prices recorded in the month declined by their sharpest since the series began in January 14 as firms pushed for more sales over profit margins.

“As a result, output prices dropped solidly in May, marking the quickest decline since the series began at the start of 2014, as firms tried to secure customer sales and curb the negative impact of the pandemic,” noted the survey.

Firms however continued to cut jobs further in the month with the employment index setting a new record low in the six year series to eclipse the previous record of job losses inside Kenya’s private sector set in April.

The cut in jobs led to a steep decline in employee benefits which set off the first contraction in input prices since January 2015.

The decline input prices were further supported by weaker purchase prices arising from the lower demand of input goods from business shutdowns.

Consequently, the stock of firm purchases remained soft as businesses opted to keep fewer inputs as a result of declining sales.

However, the backlogs of work index registered its third consecutive improvement as firms utilized the decline in business to complete previously placed orders.

Stanbic Bank Regional Economist Jibran Qureishi says firms are set to experience the worst of the pandemic at this point in time, taking in the full impact of the widespread economic disruptions.

“We still expect the epicentre of Covid-19 to be felt in Q2, with respect to economic activity. Business conditions have contracted for five consecutive months now. In fact, the employment sub-index fell by the sharpest level in May since data collection began. Consequently, the reduction in the workforce has reduced overall input prices for private sector firms. Furthermore, due to weak domestic demand conditions, firms have looked to reduce overall output prices too,” he said.

“Given the tough economic environment, exacerbated by Covid-19, higher costs passed onto consumers initially resulted in a decline in sales.”

Subsequently, the future index which measures the optimism of local firms on future growth has fallen to a 45-month low from an all-time high earlier in the year as firms become less optimistic of a recovery in the next 12 months.