Country Report Kenya October 2012

Update Country Report Kenya 01 Oct 2012

Real GDP growth edges down to 3.3% in the second quarter

Event

Real GDP growth slackened to 3.3% year on year in the second quarter of 2012, the weakest for two and a half years, while growth in the first quarter was revised downwards to 3.4% (from 3.5%), according to figures released on September 28th by the Kenya National Bureau of Statistics.

Analysis

The second-quarter slowdown primarily reflects a deceleration in private-sector credit extension (PSCE) and weaker global conditions, especially in the debt-ridden euro zone. Growth in PSCE slid to 16.5% in June, a 26-month low, amid tight money supply and high interest rates, while fragility in Europe constrained exports, investment and tourism.

Despite satisfactory precipitation during the main rainy season (April-June), growth in the dominant agricultural sector weakened to 1.7%, held back by an 8.1% decline in tea production and a 5.2% fall in sugarcane output. However, the favourable rains will boost food production in the second half, when the main harvest is reaped.

Real GDP growth by sector
(% real change, year on year, unless otherwise indicated)
 2011   2012 
Sector (ranked by size)1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr
Agriculture (incl forestry & fishing)0.24.20.31.92.31.7
Transport & communications4.83.43.96.26.14.6
Wholesale & retail trade8.75.77.96.75.15.6
Manufacturing4.02.52.34.43.83.0
Public administration (incl education)3.44.14.44.33.43.1
Real estate, renting & business services5.61.84.42.72.62.2
Financial intermediation12.68.17.63.43.66.4
Source: Central Bank of Kenya.

Accentuating the retreat in agriculture, industrial growth declined to 3.9% in the second quarter as expansion in manufacturing (3%), construction (1.4%) and mining (1.3%) all weakened, although the power and water segment gained from higher rainfall.

High interest rates had the biggest impact on the services sector, with growth slipping to 4% in the second quarter, another two-and-a-half-year low. Transport and communications, public administration, real estate and hotels and restaurants (a proxy for tourism) all grew more slowly than during the first quarter. However, wholesaling and retailing posted a stronger performance, growing by 5.6% in the second quarter, despite costlier credit.

This can be explained by the increasing sophistication of Kenyan consumers, an expansion of the middle class and massive latent demand. Similarly, growth in financial intermediation quickened to 6.4%, helped by the ongoing extension of banking services to the formerly unbanked.

Impact on the forecast

After growing by 3.4% in January-June, the economy will rebound during the second half, underpinned by a sharp decline in interest rates and the cost of credit, lower inflation and a recovery in agriculture (and hydroelectricity generation) after a good rainy season. However, owing to the sluggish first-half performance and ongoing global uncertainty, we will be revising downwards our estimate of real GDP growth for 2012.

© 2012 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information
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