Kenya’s economy remained weak in Q2, but there are signs that the key agricultural sector has held up pretty well given this year’s drought. With the drag from the sector easing, GDP growth will pick up over the remainder of this year and into 2020, when we expect that monetary stimulus will add another boost to the economy.
- Kenya’s economy remained weak in Q2, but there are signs that the key agricultural sector has held up pretty well given this year’s drought. With the drag from the sector easing, GDP growth will pick up over the remainder of this year and into 2020, when we expect that monetary stimulus will add another boost to the economy.
- Official figures released this week showed that GDP growth was unchanged at 5.6% y/y in Q2, a relatively weak outturn by recent standards. According to the breakdown, weakness in the agricultural sector was offset by stronger performances across the manufacturing, mining and construction sectors. (See Chart 1.)
- The hit to the economy from a recent drought appears to be less severe compared to previous food shocks. Despite decelerating in Q2, growth in the agricultural sector remained close to its five-year average, and was well-above the rates seen during droughts in 2011 and 2017. (See Chart 2.) And even with upward pressure on food prices, inflation has remained within the central bank’s 2.5-7.5% target range this year. (See Chart 3.) This comes as the United States Department of Agriculture estimates that total maize production will have fallen by 20% over the 2019/20 harvest year. (See Chart 4.)
- Looking ahead, we expect that agricultural production will rebound over the next 18 months as the drought fades. And price pressures are likely to remain in check. We have revised up our year-end GDP growth forecast to account for the more moderate food shock; we now think that the economy will expand by 5.8% in 2019.
- Admittedly, recently announced austerity measures mean that fiscal policy will lend less support to the economy next year. But comments by central bank Governor Patrick Njoroge suggest that the government’s push to reign in the budget deficit could open up space for monetary loosening – we’ve long argued that the next rate move will be a cut. (See here.) After a stronger-than-expected 2019, we think that growth in Kenya will accelerate to 6.0% next year as monetary easing resumes and the agricultural sector recovers.
Chart 1: GDP By Sector (% y/y)
Chart 2: Agriculture GDP (% y/y)
Chart 3: Consumer Prices and Key Rate
Chart 4: Maize Production
Sources: CBK, KNBS, USDA, Refinitiv, Capital Economics
Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, firstname.lastname@example.org