Improving demand supports private sector growth

The headline Stanbic Purchasing Managers’ Index posted 51.6 in September, up from 50.5 in August and the highest in five months as business conditions improved for the second successive month, although the latest reading was still below the series average of 52.5.

Released on September 5, the report contains the latest analysis of data collected from the monthly survey of business conditions in Uganda’s private sector.

David Kamugisha, the Head of Trading, Global Markets at Stanbic said, the decline in purchasing activity, which has led to declining inventories for the first time since September 2021, may indicate a possible decline in production in the short to medium term.

He said, “Businesses remained upbeat about the next 12 months premised by higher demand and the potential for price pressures to ease. Signs of improving demand contributed to a strengthening of business conditions in September as output and new orders increased. On the other hand, employment and purchasing activity dipped and costs continued to rise.”

The survey, sponsored by Stanbic Bank and produced by S&P Global, has been conducted since June 2016 and covers the agriculture, industry, construction, wholesale & retail and service sectors.

The headline figure derived from the survey is the Purchasing Managers’ Index (PMI) which provides an early indication of operating conditions in Uganda.

The PMI is a composite index, calculated as a weighted average of five individual sub-components including, New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%).

Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

Commenting on the latest findings, Mulalo Madula, Economist at Standard Bank said, “While still below the series average, the PMI is at its highest level in five months and has been in expansionary territory for the second consecutive month. The index’s persistence below the series average corroborates other data showing healthy, but below average growth.”

Madula said output and the growth of new orders, supported by expansion in demand, indicates a resilient business environment.

However, new orders for exports continue to decline, according to the survey. Moreover, adverse weather conditions this year could flatten productivity in the coffee sector and limit net exports.

Growth drivers

According to the index, strengthening demand conditions helped to support rises in output and new orders during September, in both cases for the second month running.

Growth was seen in the agriculture, industry and services sectors, but reductions were signalled in construction and wholesale & retail.

Despite improvements in output and new orders, Ugandan companies scaled back employment and purchasing activity. Workforce numbers were down for the fourth month running amid further signs of spare capacity, while input buying decreased for the second time in the past three months.

Important to note, however, was that lower purchasing activity fed through to a first reduction in stocks of inputs since September last year.

During the month, input prices continued to rise, with higher costs for cement, construction materials, electricity, and food products including sugar, fuel and pesticides all mentioned.

Companies also increased their salaries for the first time in three months amid rising living costs. With input costs increasing, firms also raised their own selling prices, extending the current sequence of inflation to 13 months.

Business confidence remained positive, with close to three-quarters of respondents predicting a rise in output over the next 12 months. Optimism reflected hopes that customer numbers and sales will rise alongside higher demand, with the potential for price pressures to ease.