Construction drags second quarter growth to 5.5pc

Politics and policy

A road under construction. Activity in the manufacturing sector grew by 4.5 per cent compared to 8.3 per cent in a similar period last year. PHOTO | FILE 

By NEVILLE OTUKI, notuki@ke.nationmedia.com

In Summary

• Official data shows that the economy grew by 5.5 per cent between April and June, down from the 6 per cent growth reported for the same period last year.
• Data shows that activity slowed down in the manufacturing sector which grew by 4.5 per cent compared to 8.3 per cent in a similar period last year.

Economic growth slowed down in the second quarter of the year, shackled by the near halving of activity in the key construction and manufacturing sectors in the wake of persistent exchange rate turbulence and the resulting rise in the cost of imported goods.

Official data released Wednesday shows that the economy grew by 5.5 per cent between April and June, down from the 6 per cent growth reported for the same period last year.

The performance, which analysts said had exceeded their expectations, was, however, still better than the 4.9 per cent recorded in the first quarter of the year.

“This is definitely better than I expected,” said Aly-Khan Satchu, an independent analyst who runs Nairobi-based data vending firm Rich Management.

“It is a good outcome in light of the prevailing climate that is underlain by turbulent exchange rate and rising interest rates.”

Mr Satchu, however, said that at 5.5 per cent, the second quarter growth makes it difficult for the economy to realise the Treasury’s 6.5 to 7 per cent forecast for the year, adding that momentum has been lacking in the third quarter and is unlikely to pick up in the final quarter of the year.

The economy grew by 5.3 per cent last year helped by a robust six per cent expansion in the second quarter, which was the year’s best.

Analysts’ modest expectation for the third and fourth quarter of the year is informed by the Central Bank of Kenya’s decision to increase the policy rate in May and June to a high of 11.5 per cent, whose effect has been the increase in commercial bank interest rates beginning September, portending a slowdown in consumption.

Slowdown

The Kenya National Bureau of Statistics (KNBS) second quarter data, which was released on Wednesday, shows that activity slowed down in the manufacturing sector which grew by 4.5 per cent compared to 8.3 per cent in a similar period last year.

Kenya last week unveiled an industrialisation blue print aimed at spurring growth in the sector that has stagnated at 11 per cent of gross domestic product (GDP) for the past 10 years compared to the global average of 16.1 per cent.

READ: Kenya unveils grand industrialisation roadmap

Activity in the construction, which has for long kept the economy growing, also slowed down to 9.9 per cent compared to 16.6 per cent in the second quarter of last year.

Construction, which mainly consists of infrastructure projects such as roads, railways and real estate, grew at the highest rate of 11.3 per cent in the first three months of the year.

National Construction Authority chairman Steven Oundo attributed the slowdown to rising cost of loans and a weaker shilling, which has raised costs for private developers.

The KNBS data, however, shows that commercial bank interest rates eased to an average of 15.38 per cent from 16.68 per cent in the second quarter of 2014, contrary to Mr Oundo’s assertion.

KNBS director-general Zachary Mwangi says in the agency’s latest report that the (second) quarter of the year was characterised by a fairly stable macroeconomic environment supported by a slowdown in inflation and decline in interest rates.

The report shows that the energy sector posted the best performance, having grown 10.2 per cent compared to 4.6 per cent in a similar period last year, helped by increased geothermal and hydropower generation alongside increased connection of homes and schools to the national grid.

Kenya’s economic mainstay agricultural sector, which accounts for slightly over a quarter of GDP, expanded by 5.4 per cent in the review period compared to 2.1 per cent last year, offering the much-needed support to the economy.

The country’s macro-economic environment has this year been marked by a persistent weakening of the shilling against the dollar. The turbulence has seen the Kenyan currency lose 16.3 per cent of its value to the dollar since the beginning of the year to trade at Sh105.

The turbulence occurred in the wake of falling revenues from tourism, tea and horticulture — the country’s key foreign exchange earners — amid a rising import bill.

The ongoing construction of the Sh327 billion standard gauge railway linking the port city of Mombasa and Nairobi kept the construction sector afloat, analysts said, pointing to the fact that the sector’s performance would have been much worse in the absence of the mega project.

The KNBS confirms that position, stating that the 9.9 per cent construction sector growth was due to “increased public infrastructure projects.”

Commercial banks’ lending to the construction sector stood at Sh87.5 billion up from Sh77.1 billion last year while cement consumption grew 4.8 per cent to 459,022 tonnes.

The KNBS said growth in manufacturing was supported by reduced cost of inputs such as electricity during the second quarter.

“In the food manufacturing sub-sector, there was an increase in the manufacture of soft drinks and processing of canned foods which recorded growths of 8.4 per cent and 19.2 per cent, respectively,” the bureau said.

The Treasury has said that it expects the economy to grow at between 6.5 per cent and 7 per cent this year but hopes of attaining the target now look to be slipping away.

The many challenges facing the economy have forced the International Monetary Fund (IMF) to revise its full-year growth projection from 6.9 per cent to 6.5 per cent.

Kenya’s current account has, for instance, worsened by 61.8 per cent to Sh151.2 billion in the second quarter, meaning the country imported more than it exported, piling pressure on the shilling.

“The worsening of the current account deficit in the second quarter of 2015 could be attributed to the increase in merchandise trade deficit that deteriorated to a deficit of Sh246.3 billion,” the KNBS said in its quarterly report.

A country’s net exports are one of the four broad components of gross domestic product (GDP). The others are investment, consumption and government spending.

Tourism declined for the seven consecutive quarters on the poor performance of hotels and restaurants as well as accommodation, showing the extent to which rampant insecurity has wreaked havoc in the sector.

It, however, contracted at a much slower pace of 0.8 per cent compared to 19.3 per cent last year second quarter.

“Overall, the sector recorded a 1.9 per cent drop in hotel occupancies,” the KNBS said.

The financial sector recorded a growth of 6 per cent in the review period compared to 7.9 per cent in the same quarter of 2014.

Credit to the private sector expanded by 20.6 per cent from Sh1.7 trillion in the second quarter of 2014 to Sh2.09 trillion during the same period of 2015.

Since 2010, the best performing first quarters were in 2011 when the GDP grew by 7.6 per cent and 2010 when it grew by 7.3 per cent.