Kenya’s Economy Grows by 4.6% in Q2 2024

Kenya’s economy recorded a slower growth rate of 4.6% in the second quarter of 2024, according to new data from the Kenya National Bureau of Statistics (KNBS). This growth, while positive, is a decrease from the 5.6% growth rate registered during the same period in 2023. The slower growth can be attributed to several factors, including sectoral contractions, inflationary pressures, and changing dynamics in key industries. However, sectors such as agriculture, real estate, financial services, and wholesale and retail trade have been pillars of support for the economy.

In this article, we delve into the performance of the key sectors driving the Kenyan economy in Q2 2024 and analyze the factors behind the observed trends. We will also explore the challenges and opportunities that lie ahead for the country’s economic growth in the coming quarters.

Agriculture: A Pillar of Economic Resilience

Agriculture, one of Kenya’s most vital economic sectors, expanded by 4.8% in the second quarter of 2024, contributing significantly to overall GDP growth. The sector’s robust performance was bolstered by favorable weather conditions and increased output of key agricultural products such as sugarcane, milk, and fruit exports.

Sugarcane Production

One of the most notable highlights in the agricultural sector was the significant increase in sugarcane production. According to KNBS, sugarcane deliveries surged by an impressive 81.5%, rising from 1,250.3 thousand metric tonnes in Q2 2023 to 2,269.3 thousand metric tonnes in the corresponding quarter of 2024. This surge in output can be attributed to improvements in farming practices, expansion in acreage under sugarcane, and favorable weather conditions in key growing regions.

The increased sugarcane production has had a positive impact on related industries, such as sugar manufacturing and processing, while also providing a boost to employment in rural areas. However, challenges such as fluctuating global sugar prices, rising production costs, and competition from imported sugar remain potential risks to the sector’s continued growth.

Milk and Dairy Products

The dairy industry also contributed to the growth of the agriculture sector, with milk deliveries to processors expanding by 7.9% to 221.1 million liters in Q2 2024. The increase in milk production can be attributed to favorable climatic conditions that improved pasture availability, as well as investments in modern dairy farming techniques. This growth in the dairy sector not only supports rural livelihoods but also enhances food security by ensuring a steady supply of dairy products to the domestic market.

Despite the positive performance, the dairy sector faces challenges such as fluctuating milk prices, high costs of inputs like animal feed, and the need for better infrastructure to improve cold chain logistics and milk collection systems.

Fruit Exports

The export of fruits, another critical component of Kenya’s agricultural output, grew by 4.3% during the second quarter of 2024, reaching 71,787.0 metric tonnes. This growth reflects Kenya’s continued efforts to expand its agricultural export base, with fruits such as avocados, mangoes, and pineapples driving the increase in export volumes.

The steady rise in fruit exports underscores the importance of Kenya’s horticultural sector in supporting the country’s foreign exchange earnings and providing a source of livelihood for small-scale farmers. However, the sector is exposed to challenges related to global market access, stringent export standards, and the impact of climate change on crop yields.

Real Estate, Finance, and Wholesale Trade: Key Drivers of Growth

Several other sectors of the economy also played a critical role in driving Kenya’s economic growth in Q2 2024. Notably, real estate, financial services, and wholesale and retail trade performed well during the period, helping to offset contractions in other industries.

Real Estate

The real estate sector continued to show resilience, expanding by 6% during the second quarter. The sector’s performance was supported by increased demand for housing, commercial properties, and infrastructure development. Ongoing government projects in affordable housing and urban regeneration have also contributed to the growth of the real estate industry.

However, the real estate sector faces challenges such as high construction costs, limited access to financing for developers, and a slowdown in private sector investments in commercial real estate due to economic uncertainties. The construction sector’s contraction during the same period, which we will discuss later, highlights some of the hurdles facing the industry.

Financial and Insurance Services

The financial and insurance sector grew by 5.1% in Q2 2024, driven by increased activity in banking, mobile financial services, and insurance. The adoption of digital banking and fintech solutions has revolutionized the financial landscape in Kenya, allowing greater access to financial services, particularly in rural and underserved areas.

The sector’s growth reflects the ongoing digital transformation in Kenya, which has seen financial institutions leverage technology to offer more efficient and accessible services. Mobile money platforms such as M-Pesa continue to be a driving force in the economy, with increasing usage in transactions, savings, and lending.

Despite this growth, the financial services sector is not without challenges. Rising inflation and interest rate fluctuations pose risks to lending activity, while increasing competition among financial institutions puts pressure on profit margins. Additionally, the sector must navigate evolving regulatory requirements and ensure cybersecurity in the face of rising digital transactions.

Wholesale and Retail Trade

Wholesale and retail trade grew by 4.4% in Q2 2024, reflecting improved consumer spending and increased activity in both formal and informal markets. The sector’s growth was supported by stable supply chains, increased e-commerce activity, and consumer demand for fast-moving consumer goods (FMCGs).

However, the sector’s growth has been tempered by rising inflation, which affects the purchasing power of consumers. Retailers are also grappling with increasing operating costs, particularly in logistics and distribution, as well as competition from online retailers.

Sectors Facing Contraction: Mining, Quarrying, and Construction

While several sectors of the economy recorded positive growth, others faced significant challenges during the second quarter of 2024. In particular, the mining, quarrying, and construction sectors experienced contractions, contributing to the overall slowdown in economic growth.

Mining and Quarrying

The mining and quarrying sector contracted by 2.7% in Q2 2024, a reversal from the 2.7% growth recorded in the same period in 2023. The decline in this sector can be attributed to reduced global demand for minerals, fluctuating commodity prices, and operational challenges in mining operations. Additionally, environmental regulations and the need for sustainable mining practices have increased compliance costs, further affecting the profitability of the sector.

Kenya’s mining sector remains underdeveloped compared to other industries, and there is potential for growth if the government can create a conducive environment for investment, improve infrastructure, and streamline regulatory processes.

Construction

The construction sector, which contracted by 2.9% in Q2 2024, was another area of concern. This contraction marks a significant downturn from the 2.7% growth observed in Q2 2023. The slowdown in construction activity can be attributed to high costs of building materials, labor shortages, and a reduction in government spending on infrastructure projects. Rising inflation and interest rates have also made it more difficult for developers to access financing for construction projects.

The contraction in the construction sector has broader implications for employment and economic growth, as the industry is a major employer and contributor to the economy. To reverse this trend, the government may need to provide incentives for developers, reduce the cost of building materials, and increase investments in public infrastructure projects.

Inflation: Slowing but Still a Concern

One of the positive developments during the second quarter of 2024 was the decline in the inflation rate. Inflation averaged 4.87% in Q2, down from 7.94% in the same period last year. The slowdown in inflation was primarily driven by lower prices for transportation, food, and non-alcoholic beverages. Lower fuel prices, improved agricultural output, and stable supply chains helped ease inflationary pressures.

While the decline in inflation is a welcome relief for consumers and businesses, inflationary risks remain. Global oil price volatility, climate-related disruptions to agricultural production, and exchange rate fluctuations could lead to renewed inflationary pressures in the coming months.

Conclusion: Navigating Economic Headwinds

Kenya’s economy showed resilience in Q2 2024, growing by 4.6% despite facing several challenges. Strong performances in the agriculture, real estate, financial services, and wholesale and retail trade sectors helped offset contractions in mining, quarrying, and construction. The agriculture sector, in particular, remains a key driver of growth, while the real estate and financial services sectors benefit from digital innovation and ongoing infrastructure development.

However, economic growth has slowed compared to the previous year, reflecting the impact of rising inflation, high production costs, and sectoral contractions. Moving forward, Kenya will need to address the structural challenges in its economy, support key sectors through policy interventions, and maintain macroeconomic stability to ensure sustainable growth.

As the government continues to focus on economic diversification, digital transformation, and infrastructure development, there are opportunities for Kenya to unlock new sources of growth and navigate the headwinds facing its economy.