The increasing inflationary pressures negatively impacted private sector business activities during the month of July as the headline Stanbic Purchasing Managers’ Index (PMI) went below the threshold of 50.0 for the first time this year.
The PMI – an index that is used to measure the mood within the business community - dropped from 50.9 recorded in June to 48.2 in July, with firms scaling back their employment and purchasing activities, ending an 11-month sequence of expansion.
Readings above 50.0 mean improvement in business conditions while those below 50.0 show deterioration. The Stanbic PMI is based on findings which cover agriculture, industry, wholesale and retail, construction and service sectors.
It is a composite index, calculated as a weighted average of five individual sub-components: new orders (30 per cent), output (25 per cent), employment (20 per cent), suppliers’ delivery times (15 per cent) and stocks of purchases (10 per cent).
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, said 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 dampened demand.
Business activities decreased as inflationary pressures impacted the private sector. Activity decreased in the construction and services sectors, but rose in agriculture, industry and wholesale and retail.
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 the prices of their goods and services.
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.
Respondents indicated that scarcity of fuel and materials, plus higher transportation costs, were part of the reasons the performance of vendors slumped.
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 the decline in total new businesses from abroad for three consecutive months now, new export orders also decreased over the course of the month.