Increasing inflationary pressures tumbled private sector business activity during July as the headline Stanbic Purchasing Managers’ Index (PMI) dipped below the threshold 50.0 no-change mark for the first time this year.
The PMI dropped from 50.9 recorded in June to 48.2 in July with firms scaling back their employment and purchasing activity and ending an 11-month sequence of expansion.
Readings above 50.0 mean improvement in business conditions on the previous month while readings that are below 50.0 show deterioration. The Stanbic PMI is based on findings that cover agriculture, industry, construction, wholesale & retail and service sectors.
It is a composite index, calculated as a weighted average of five individual sub-components: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). The survey, sponsored by Stanbic Bank and produced by S&P Global, has been conducted since June 2016.
Ronald Muyanja, the Head of Trading at Stanbic Bank Uganda, explained, “higher costs reflected increases in a range of inputs, most notably fuel and transportation. New orders decreased for the first time since July 2021, with firms reporting that price rises and a lack of money in the economy had acted to dampen demand.
“In turn, business activity also decreased as inflationary pressures impacted the private sector. Activity decreased in the construction and services sectors, but rose in agriculture, industry and wholesale & retail.”
Expensive fuel blamed According to the results from the latest survey, inflationary pressures were highlighted by a further increase in overall input costs, widely linked to higher fuel and transportation costs, plus rising prices for utilities and a range of raw materials.
In response to higher cost burdens, firms continued to increase their selling prices. In contrast, staff costs decreased at the start of the third quarter, reflecting a reduction in employment as firms responded to lower new orders. “Employment decreased for the second month running during July.
Some firms took on extra staff to help keep up with workloads, but this was outweighed by those companies that reduced workforce numbers due to falling new orders. Sector data suggested that the overall reduction in employment was centered on construction firms,” he said.
Purchasing activity was also scaled back, ending a nine-month sequence of expansion. Stocks of purchases continued to rise, however, as a drop in activity meant that firms held excess inventories. Suppliers’ delivery times lengthened for the first time in a year, due to scarcity of fuel and materials plus higher transport costs. Suppliers’ delivery times lengthened for the first time in a year at the start of the third quarter.
Respondents indicated that scarcity of fuel and materials, plus higher transportation costs had been behind the deterioration in vendor performance.
Despite a decline in business conditions in July, Ugandan companies remained optimistic that output will increase over the coming year—firms were also hopeful that inflationary pressures will soften, helping to support growth of new orders. Alongside a decline in total new business from abroad—for three consecutive months now, new export orders also decreased over the course of the month.