Kenya: Economy grows at the fastest pace in eight years in 2018
Economic growth climbed to 6.3% in 2018, well above 2017’s 4.9% expansion and marking the fastest acceleration in eight years. Growth leapt amid favorable weather conditions, which propelled agricultural activity and hydro-powered electricity output on the production side, while a return to growth in exports drove the expansion on the expenditure side.
On the production side, the agricultural and energy sectors were key growth drivers, buoyed by sufficient and well-distributed rainfall. Agricultural output growth shot up to 6.4% in 2018 (2017: +1.9%), while electricity supply rose 10.5% (2017: +8.9%). Moreover, the manufacturing sector gained steam (2018: +4.2%; 2017: +0.5%), largely thanks to a recovery in agro-processing activities and production of beverages, while an acceleration in the transportation and storage sector (2018: +8.8%; 2017: +7.2%) also supported growth. The latter mainly reflected an increase in railway transport activities, which has thrived since the launch of new train services between Mombasa and Nairobi.
Turning to a breakdown by expenditure, a turnaround in the external sector propelled growth. Exports rebounded sharply, swinging from a 6.8% contraction in 2017 to a 4.0% expansion in 2018, led by higher sales of tea, horticulture, clothing, coffee, and titanium ore. Growth in imports, meanwhile, lost speed (2018: +2.6%; 2017: +8.7%). On the downside, domestic demand dynamics deteriorated. Fiscal consolidation efforts caused government spending to decelerate markedly (2018: +1.0%; 2017: +5.1%), while the long-standing cap on commercial bank lending rates weighed on both household consumption and private investment. Private consumption growth fell to 5.9%, down from 7.6%, and fixed investment rose 4.6% following a 6.4% upturn in 2017.
Growth should remain robust this year on the back of ongoing infrastructure investment under President Kenyatta’s “Big Four Agenda”, spanning the manufacturing, food security, affordable housing and healthcare sectors. At the same time, strong influx of remittances and flourishing tourism activity, combined with robust capital inflows, should bolster foreign exchange reserves and help the Kenyan shilling (KES) hold steady. That said, the long-standing cap on commercial bank lending rates will likely continue to weigh on household spending and private investment. Moreover, the balance of risks is largely tilted to the downside: On the domestic front, the persistence of drought conditions curtailing agricultural activity and fiscal slippages weakening macroeconomic stability; on the external front, rising global trade tensions weighing on export performance and remittances, and tighter global financial conditions triggering capital outflows.