Kazakhstan service sector contracts amid weaker demand

The latest Freedom Holding Corp. PMI indicated a renewed decline in service sector activity across Kazakhstan midway through the first quarter of 2026. Companies attributed the drop in new orders to January’s increase in value-added tax (VAT), which led to further sharp rises in both input costs and output prices in February. In response, firms reduced staffing levels, reversing the marginal job creation recorded in the opening month of the year.

The headline Freedom Holding Corp. PMI Business Activity Index fell below the neutral 50.0 mark midway through the first quarter. A reading of 48.0, down from 50.5 in January, signaled a modest decrease in business activity across Kazakhstan’s service sector. Activity has now declined in four of the past five survey periods, with the latest drop the sharpest since February 2023.

The decline was accompanied by a fresh fall in new business, which contracted at the same modest pace as overall activity. According to survey respondents, the slowdown in service sector output largely resulted from fewer new orders. Some participants also reported that customers faced tighter financial conditions, which further reduced demand.

Amid weaker demand trends linked to the VAT change earlier in the year, new business fell for the first time in 16 months in February. The rate of decline was modest and similar to the fall in business activity, though it was the steepest drop in new orders in nearly four years.

In line with declines in both service sector activity and new business, service providers in Kazakhstan reduced staffing levels during the latest survey period. This followed a month of marginal job creation. The seasonally adjusted employment index has now remained below 50.0 in five of the past six survey periods, although the pace of job cuts was relatively modest.

According to Yerlan Abdikarimov, head of the Financial Analysis Department at Freedom Finance Global PLC, Kazakhstan’s services sector recorded its sharpest decline in demand in four years in February.

«While the industry attempted to absorb the initial tax-driven shock through margin compression in January, the current reduction in employment and business activity suggests that this internal buffer is being exhausted,» he said. «Despite a modest easing in headline inflation, price pressures remain elevated. The negative spread between output and input price growth in 2026 has more than tripled compared with the previous two-year average, highlighting intensifying margin pressures amid weak demand.»

Private sector output across Kazakhstan also fell at the fastest pace in just over four years in February. The Kazakhstan Composite PMI Output Index dropped to 47.2 from 49.7 in January, signaling a solid decline in output and the steepest fall since early 2022. Survey data showed that a deeper contraction in manufacturing output was accompanied by another drop in service sector activity.

Despite declines in output and new orders, business confidence across the private sector continued to improve. Optimism reached a four-month high in February, although it remained below the historical average. Twelve-month business expectations also showed moderately positive momentum, suggesting cautious optimism about stabilization as firms adjust to the new fiscal environment.