Private firms in Kenya stepped up recruitment of workers on short-term contracts in July as they raced to cope with rising new orders despite overall production contracting for a fifth consecutive month, signalling an uneven economic recovery.
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI) showed that employment growth in July was the fastest since January 2026, while output remained subdued, reflecting a mixed-picture of growing confidence among firms and persistent supply-side constraints.
The report showed that companies received more customer orders, even though many struggled to keep pace because imported materials continue to arrive late while fuel and transport costs remain elevated, squeezing margins and limiting production.
“Kenya’s PMI increased in July as conditions in the private sector improved. The headline gain was mainly driven by stronger new orders and modest short-term hiring,” Stanbic economist Christopher Legilisho said in the report.
The PMI rose to 51.3 in July from 50.0 in June, ending four months of stagnant business conditions and signalling a modest improvement across the private sector. A reading above 50 indicates an expansion in business activity.
The index measures economic performance in the private sector such as output, new orders and employment based on feedback from about 400 corporate managers in agriculture, manufacturing, construction, wholesale, retail, services and mining.
New customer orders increased at the fastest pace since January, supported by customer referrals, marketing campaigns and the launch of new products. However, the rise in demand did not translate into stronger production, with businesses instead relying on short-term hiring to manage heavier workloads.
The divergence between rising demand and weak output suggests that many firms remain cautious about making long-term investments or expanding permanent capacity despite signs of an economic recovery.
“Output stayed subdued as elevated inflation, higher input costs and tight cash flows constrained production,” Mr Legilisho said.
The survey findings point to mounting pressure on businesses as unfinished work continued to accumulate, indicating companies are becoming busier than their existing production capacity can handle.
“Rising backlogs point to supply-side frictions, with delayed import deliveries limiting firms’ ability to convert new orders into actual output,” Legilisho said.
About 37 percent of firms reported higher operating costs in July, driven mainly by expensive transport, rising fuel prices and shortages of imported materials.
The cost of imported goods and raw materials increased at the fastest pace since November 2023, piling pressure on manufacturers, construction firms and other businesses that rely on imported inputs.
Despite the sharp increase in costs, many companies chose not to fully pass them on to customers, opting instead to absorb part of the increase to protect demand.
“Output price inflation softened, even as input cost pressures remained elevated, implying that some firms absorbed costs to protect demand,” Mr Legilisho said.
While that strategy has helped sustain sales, it is likely to squeeze profit margins if cost pressures persist. Continued hiring without a corresponding increase in production could also weigh on corporate earnings, tax revenues and future investment.
Even so, business confidence strengthened to its highest level in more than three years, with many firms planning to introduce new products, invest in digital technologies and strengthen their supply chains in the next 12 months.
“The July PMI suggests that demand is beginning to recover but cost pressures and logistics bottlenecks are still constraining activity,” Mr Legilisho said.
This comes as the Kenya National Bureau of Statistics (KNBS) reported annual inflation—a measure of the increase in the average cost of goods and services over the previous year—edged up from 6.4 percent in June to 6.5 percent in July.
Although only slightly higher than the previous month, the reading remained close to May’s 6.7 percent, the highest since January 2024, underscoring the wave of price increases that followed the escalation of conflict in the Middle East.
The KNBS data shows transport remained the biggest source of inflationary pressure, with prices rising 15.6 percent over the past year—the fastest increase among the 13 categories used to calculate the Consumer Price Index.
Food and non-alcoholic beverages recorded annual inflation of 9.0 percent, while housing, water, electricity, gas and other fuels rose 3.2 percent.
