As economic pressures mount, a new consumer index reveals that the majority of Kenyans are cutting back on non-essential purchases to stay afloat. The ILAM Consumer Spending Index for the Second Quarter of 2024 highlights the significant impact of rising prices on consumer behavior, with 77 percent of Kenyans reporting increased spending on essential goods due to inflation.

Economic Challenges and Consumer Behavior

The survey, conducted by ICEA LION Asset Management, paints a stark picture of the current economic landscape in Kenya. Only 23 percent of respondents indicated that their increased spending was due to purchasing additional goods. The majority are spending more merely because prices have risen, not because they are buying more.

“Reduction in goods being purchased may be driven by substitution for cheaper products and possibly not spending at all,” explained Richard Muriithi, Senior Portfolio Manager at ICEA LION Asset Management.

Income Stagnation and Spending Patterns

A significant factor driving this change in spending habits is income stagnation. The index shows that half of the respondents reported static income levels over the past year, while 30 percent experienced a decrease in income. Less than 20 percent of those surveyed saw their incomes rise in the second quarter of 2024 compared to the same period in 2023. This is a deterioration from the first quarter of 2024, when 25 percent noted increases and decreases in income respectively.

“Respondents working in the manufacturing and education sectors had the highest proportions of improved incomes while those in the trade, transport, and logistics sectors had the largest proportion of reduced incomes,” said Muriithi.

Sector-Specific Trends and Implications

The ILAM Consumer Spending Index also sheds light on sector-specific trends. While the overall retail business sales trends remained flat between the first and second quarters of 2024, there were variations across different business sizes. Large and medium-sized businesses saw an improvement in sales, which was countered by a decline in sales for small and micro businesses.

Certain sectors experienced a rise in sales trends, particularly clothing, retail shopping, and food & beverage. However, this positive trend was offset by significant drops in the house fittings and accessories sectors. This suggests that while consumers continue to spend on essential items and clothing, they are deferring purchases of non-essential home improvement goods.

Demographic Insights

The survey further breaks down spending patterns by demographics, revealing that the additional spending was mainly driven by women and consumers aged between 26 and 35. This age group is typically more active in the workforce and possibly facing greater financial pressures due to family and lifestyle commitments.

In terms of socio-economic categories, the lower middle-income segment recorded the strongest improvement in spending trends in the second quarter. Conversely, the lower-income segment experienced the most significant decline in spending trends. This disparity highlights the uneven impact of economic challenges across different income groups.

Credit Purchases and Financial Behavior

Interestingly, credit purchases remain relatively low in Kenya, with 87 percent of Kenyans making purchases using their own income, while only 13 percent relied on credit. This indicates a cautious approach to spending and a possible lack of access to credit facilities for many Kenyans.

Expert Commentary and Future Outlook

“Individual spending trends continued to remain resilient in a challenging economic environment while retail business sales trends remained relatively muted,” said Einstein Kihanda, CEO of ICEA LION Asset Management. This resilience is indicative of the adaptability and resourcefulness of Kenyan consumers in the face of economic adversity.

The broader economic context includes several contributing factors to the financial strain experienced by Kenyan consumers. Inflation rates have been on the rise, driven by various global and local factors. The cost of living has increased due to higher prices for basic goods and services, which has outpaced wage growth for many workers.

Government Policies and Economic Strategies

The Kenyan government has been attempting to address these economic challenges through various policies and initiatives. Efforts to stabilize the economy include monetary policy adjustments by the Central Bank of Kenya, aimed at controlling inflation and encouraging economic growth. Additionally, fiscal policies aimed at boosting economic activity and providing relief to the most affected sectors have been implemented.

However, these measures take time to filter through to the everyday experiences of Kenyan consumers. In the short term, many households continue to feel the pinch of higher prices and stagnant incomes. The government has also been encouraging investment in key sectors such as manufacturing and technology to drive long-term economic growth and job creation.

Global Economic Influences

Kenya’s economic situation is not occurring in isolation. Global economic trends, including supply chain disruptions, fluctuations in oil prices, and geopolitical tensions, have a direct impact on the local economy. These global factors contribute to price increases and affect the availability of goods, further straining household budgets.

Strategies for Coping with Economic Strain

Amidst these challenges, Kenyan consumers are employing various strategies to cope with economic strain. Substitution of more expensive goods for cheaper alternatives, reducing non-essential purchases, and finding additional sources of income are common tactics. Community support systems, including informal savings groups known as “chamas,” play a vital role in helping families manage financial difficulties.

The Role of Financial Literacy

Financial literacy and education are crucial in helping consumers navigate economic challenges. Understanding budgeting, saving, and prudent spending can empower individuals to make informed financial decisions. Various organizations and financial institutions in Kenya are working to improve financial literacy through workshops, online resources, and community programs.

Conclusion

The ILAM Consumer Spending Index for the Second Quarter of 2024 highlights the significant economic challenges faced by Kenyan consumers. Rising prices, stagnant incomes, and a cautious approach to spending characterize the current financial landscape. While some sectors and demographic groups show resilience, others continue to struggle with the impact of economic strain.

The future outlook depends on a combination of effective government policies, global economic conditions, and the adaptability of Kenyan consumers. As the country navigates these challenges, continued focus on financial literacy, strategic investments, and community support will be essential in fostering economic resilience and growth.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

30th July, 2024