Kenya’s economy expanded by 4% in the third quarter of 2024, marking a notable slowdown from the 6% growth recorded during the same period in 2023, as per the latest data released by the Kenya National Bureau of Statistics (KNBS). The downturn highlights the mounting challenges faced by key sectors, such as construction and mining, which experienced significant contractions, amid broader economic pressures.

A Closer Look at Key Economic Indicators

Sectoral Contractions

The overall deceleration in growth is primarily attributed to declines in the construction and mining sectors:

• Construction Sector: Contracted by 2%, with notable reductions in cement consumption, which fell by 10%. The import of essential materials like bitumen and galvanized sheets also dropped significantly, further highlighting the sector’s struggles.
• Mining and Quarrying: Suffered an even steeper contraction of 11.1%, reflecting reduced activity and investment in the extractive industries.

Credit Constraints

The construction sector was further hampered by a 13.6% decline in credit extended to enterprises. The total credit to the sector stood at Ksh.129.2 billion in September 2024, down from Ksh.149.6 billion a year earlier. Limited access to funding has curtailed ongoing projects and deterred new investments, exacerbating the sector’s challenges.

Sectors Driving Growth

Despite setbacks in some areas, other sectors demonstrated resilience and growth:

• Agriculture, Forestry, and Fishing: Expanded by 4.2%, driven by favorable weather conditions that boosted sugarcane and milk production. Increased agricultural output provided stability for rural economies and export markets.
• Transportation and Storage: Grew by 5.2%, supported by higher fuel consumption and increased port throughput, reflecting a rebound in trade activities and logistics operations.
• Accommodation and Food Services: Led the growth trajectory with a robust 13.7% expansion, underscored by a strong recovery in domestic and international tourism.

Positive Contributions from Other Sectors

• Financial and Insurance Services: Benefited from increased digital transactions and expanded banking operations, contributing to overall economic activity.
• Real Estate and Wholesale/Retail Trade: Maintained positive momentum, reflecting steady consumer demand and ongoing urbanization.
• Manufacturing: Showed modest growth of 2.3%, bolstered by gains in food production sectors like sugar and dairy, despite facing challenges in other sub-sectors.

Inflation Trends and Cost of Living

Inflationary pressures eased significantly during the quarter, with the inflation rate dropping to 4.08% in Q3 2024 from 6.93% in Q3 2023. This decline was largely attributed to lower food and beverage prices, which provided relief to households struggling with high living costs.

Key Factors in Inflation Reduction

• Improved agricultural yields helped stabilize food prices, reducing the cost of staples.
• A stable Kenyan shilling, coupled with reduced global energy prices, also contributed to easing inflationary pressures.

Challenges and Opportunities

Structural Weaknesses

The contraction in construction and mining highlights persistent structural challenges in these sectors. Issues such as high borrowing costs, delayed public infrastructure projects, and reduced private sector confidence have hindered growth.

Policy Interventions

To address these issues, the government has announced plans to:

• Increase public investment in infrastructure to stimulate the construction sector.
• Enhance credit access for small and medium-sized enterprises (SMEs) in mining and related industries.
• Streamline regulatory frameworks to attract foreign investment into underperforming sectors.

Tourism and Service Sector Recovery

Kenya’s tourism sector has emerged as a bright spot in the economy, thanks to a combination of government incentives and improved global travel conditions.

• The 13.7% growth in accommodation and food services reflects the return of international tourists, driven by aggressive marketing campaigns and an emphasis on unique experiences such as wildlife safaris and cultural heritage tours.
• The government’s ongoing initiatives, such as waiving visa fees for children and diversifying tourism products, have played a pivotal role in boosting visitor numbers.

Global and Regional Economic Context

External Pressures

Kenya’s economy, like many others in the region, is influenced by global factors such as fluctuating commodity prices, geopolitical tensions, and shifting trade dynamics. A slowdown in China, one of Kenya’s key trading partners, has also dampened export prospects.

Regional Integration

As a member of the East African Community (EAC), Kenya stands to benefit from regional infrastructure projects, such as the Standard Gauge Railway and the Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) Corridor. These initiatives aim to enhance connectivity and trade, providing a long-term boost to economic growth.

Sustainable Development and Green Growth

In light of the global focus on sustainability, Kenya is positioning itself as a leader in renewable energy and green growth.

• The government has launched several programs to promote clean energy, including the expansion of geothermal and solar power projects.
• Efforts to modernize agricultural practices, reduce carbon emissions, and adopt circular economy principles are gaining traction, aligning with Kenya’s Vision 2030 development agenda.

Looking Ahead: Prospects for 2025

As Kenya enters 2025, the outlook remains cautiously optimistic. Key areas of focus include:

1. Revitalizing Construction and Mining: Increased public-private partnerships and strategic investments are expected to drive recovery in these sectors.
2. Leveraging Digital Transformation: Expanding access to digital services and fostering innovation will be critical to sustaining growth in financial services and e-commerce.
3. Enhancing Export Competitiveness: Diversifying export markets and value-added production will help mitigate external risks and create jobs.

Conclusion

Kenya’s 4% economic growth in Q3 2024 underscores both the resilience and vulnerabilities of its economy. While contractions in key sectors like construction and mining pose challenges, the strong performance in agriculture, tourism, and transportation highlights the potential for recovery and sustainable growth.

To navigate these challenges and capitalize on opportunities, Kenya must prioritize structural reforms, strategic investments, and regional cooperation. With a balanced approach, the country can overcome short-term setbacks and position itself for long-term economic prosperity.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

8^th January, 2024