Kenya’s economic growth slowed to a two-year low in the second quarter (Q2) of 2024, registering a 4.6% expansion compared to 5.6% during the same period in 2023, according to the Kenya National Bureau of Statistics (KNBS). This marked a decline from the 5% growth recorded in the first quarter of 2024, reflecting the increasing challenges facing the country’s economy.

Key Contributors to Growth

The modest expansion was largely driven by growth in key sectors like agriculture, manufacturing, real estate, forestry and fishing, wholesale and retail trade, and financial services. However, contractions in sectors such as mining, quarrying, and construction tempered the overall performance, resulting in slower growth compared to previous quarters.

Agriculture: A Mixed Performance

Agriculture, which remains one of the pillars of Kenya’s economy, grew by 4.8% in Q2 2024, a notable slowdown from the 7.8% growth seen during the same period in 2023. This was driven by increased production of sugarcane, milk, and fruit exports, although tea production contracted by 0.6%, affecting the overall agricultural performance. The impact of reduced tea output, one of Kenya’s top foreign exchange earners, weighed heavily on agricultural growth, as the sector continues to grapple with challenges such as erratic weather conditions and fluctuating global prices.

The tea sector, which experienced a slight decline, is a crucial part of Kenya’s export economy, and reduced output often has a direct impact on trade balances. Sugarcane production, however, showed a significant recovery, supporting overall agricultural growth. Additionally, dairy farming has played a key role in bolstering the sector, with milk production rising considerably during the quarter, indicating that Kenya’s agricultural diversification efforts are beginning to pay off.

Manufacturing Sector Resurgence

Manufacturing emerged as a bright spot in Kenya’s Q2 performance, posting a 3.2% growth compared to the 1.5% growth observed during the same period in 2023. This improvement was largely supported by a significant increase in the production of food items, including soft drinks, sugar, and milk. Despite this, challenges remain in specific areas such as tea production, where the sector recorded a 0.6% decline, further highlighting the effects of fluctuating global demand and local supply challenges.

Kenya’s food and beverage manufacturing industry showed resilience, driven by increased demand in both local and export markets. However, the performance of non-food manufacturing segments, particularly motor vehicle assembly, faced substantial headwinds, contracting by a staggering 17.3% during the quarter. The automotive sector’s struggles reflect a broader slowdown in Kenya’s industrial activities, largely attributed to declining consumer demand, high production costs, and reduced access to foreign markets.

Declines in Mining, Quarrying, and Construction

The mining and quarrying sectors contracted by 2.7% in Q2 2024, a significant shift from the 8.3% expansion seen in the same period in 2023. Similarly, the construction sector saw a 2.9% contraction, reversing the 2.7% growth recorded in Q2 2023. These declines are largely attributed to disruptions in supply chains, rising costs of raw materials, and the reduced availability of credit, which has slowed down construction activities across the country.

The mining sector’s contraction reflects the continuing challenges facing Kenya’s extractive industries, where lower production volumes and volatile global commodity prices have negatively impacted output. Moreover, the construction sector’s downturn is closely tied to the government’s fiscal consolidation efforts, which have led to a reduction in public infrastructure projects. Additionally, increased costs of materials like cement, which saw an 8.1% decline in production and a 7.8% drop in consumption, have stifled growth in this critical sector.

Energy and Transport

Electricity sales increased during the review period, driven by a rise in imports. The electricity subsector’s mild growth was supported by increased generation from hydro sources and a reduction in thermal generation, signaling a shift toward more sustainable energy sources. The reliance on hydroelectric power has provided Kenya with more stability in its energy supply, especially during the rainy season when water levels in dams are higher. This, coupled with a reduction in thermal power generation, has helped Kenya reduce its carbon footprint and keep energy prices relatively stable.

In the transport sector, domestic passenger traffic in both air and railways saw a decline due to the seasonal downturn in demand. However, revenue from passenger railway transport rose by 36.8% to KSh971.6 million, largely thanks to the increased cargo volumes on the Standard Gauge Railway (SGR), which grew by 8.7%. The SGR has become a vital link for cargo transportation between Mombasa and Nairobi, contributing significantly to the logistics and transportation sector.

Tourism and High-Profile Events

The tourism sector, a key contributor to Kenya’s GDP, saw a 6.4% increase in visitor arrivals during the review period. This was driven by several high-profile events held in Nairobi between April and June 2024, including the inaugural Connected Africa Summit 2024, Swift Connect Africa 2024, and the Global Peace Leadership Conference (GPLC) Africa 2024. These events attracted thousands of international visitors, contributing to growth in the accommodation and food services sectors.

Tourism remains a critical part of Kenya’s strategy to diversify its economy, with Nairobi continuing to solidify its status as a regional hub for international conferences and events. The growth in visitor arrivals is a positive sign, particularly in light of the challenges the sector faced during the COVID-19 pandemic. The government has prioritized tourism promotion as a key pillar for economic recovery, with the aim of boosting both local and international visitor numbers in the coming years.

Financial and Insurance Sector

Financial and insurance activities grew by 5.1% in Q2 2024, a significant drop from the 13.2% growth recorded in Q2 2023. The slowdown in financial sector growth can be partly attributed to the higher central bank rates, which increased from 10.50% in Q2 2023 to 13.00% in Q2 2024. Higher interest rates have made borrowing more expensive, leading to a reduction in private sector credit growth, which expanded by just 3.3% to KSh6.8 trillion in June 2024.

Despite the slower growth, Kenya’s financial sector remains relatively resilient, bolstered by a stable banking system and a growing insurance market. Broad money supply expanded by 7%, reflecting the ongoing efforts by financial institutions to increase liquidity in the market. However, the higher interest rates pose a challenge to sustained growth in the sector, as borrowing costs remain elevated.

Impact of Protests and Political Tensions

The second quarter of 2024 was also marked by widespread protests against the government’s tax hikes, which negatively impacted consumption and output levels. The protests, which resulted in disruptions to businesses and public services, had a particularly damaging effect on the retail and wholesale trade sectors. Despite the political tensions, the stable performance of key sectors such as agriculture and manufacturing helped mitigate the overall impact on the economy.

Political instability remains a key risk to Kenya’s economic outlook, as it undermines investor confidence and disrupts business operations. The government’s fiscal consolidation measures, including the controversial tax hikes, have sparked public outrage, leading to calls for reforms in taxation and governance. The ongoing tensions have the potential to further dampen economic growth if left unresolved.

Outlook for the Rest of 2024

Looking ahead, Kenya’s economic prospects for the remainder of 2024 are uncertain. While growth in sectors such as agriculture, manufacturing, and tourism is expected to continue, challenges in the construction, mining, and financial sectors could weigh on overall performance. The government’s ability to manage political tensions, control inflation, and maintain fiscal discipline will be crucial in determining the trajectory of Kenya’s economy in the coming months.

Additionally, external factors such as global commodity prices, exchange rate volatility, and geopolitical risks will play a significant role in shaping Kenya’s economic outlook. As the country navigates these challenges, policymakers will need to prioritize reforms aimed at improving governance, boosting investor confidence, and fostering sustainable economic growth.

In conclusion, while Kenya’s economic growth slowed in Q2 2024, there are still opportunities for recovery in the coming quarters. The government’s efforts to diversify the economy, coupled with resilience in key sectors, provide a foundation for continued growth. However, addressing the structural challenges facing the economy, particularly in the areas of infrastructure and governance, will be essential to ensuring long-term stability and prosperity.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

3rd October, 2024