Business activity in Arab world's largest economies continues to grow in March

Saudi Arabia's PMI reading climbs to the highest level since November last year

The Riyadh skyline. Business activity in Saudi Arabia's non-oil private sector economy recorded a sharp rise in March. Reuters

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE improved sharply in March as demand grew and output and new orders continued to rise despite cost pressures.

The seasonally adjusted S&P Global Saudi Arabia Purchasing Managers’ Index rose to 56.8 in March from 56.2 in February, The reading was the highest recorded since November last year, marking an overall improvement in the kingdom’s business conditions as it continues to emerge from pandemic-driven slowdown. It was also the fastest rise in non-oil activity since the end of 2017.

A reading above the neutral level of 50 indicates expansion while one below it points to a contraction.

"The Saudi Arabia PMI continued to signal strong growth in the non-oil economy ... as new business and activity rose sharply in line with recovering client demand," David Owen, an economist at S&P Global, said.

"Supply chains also displayed strength, with lead times shortening to the greatest extent for three years. In turn, companies raised their purchasing at the fastest rate since December 2017, supporting higher capacity levels."

Three of the five sub-indices of the PMI positively influenced overall reading in the latest survey period, most notably the Output Index, which rose to its highest level in more than four years.

Businesses surveyed mostly attributed the month-on-month rise in output to new orders and work related to existing projects. New business also registered a marked growth at the end of the first quarter, rising to the strongest level since November 2021.

The waning impact of the pandemic on the overall economy and a subsequent pick up in business activity led to a rise in new business and increase in sales. Companies said new export orders rose for the first time in three months, but at a modest pace.

With strong pick up in output and new orders, non-oil companies in Saudi Arabia increased purchasing in March. The expansion in input buying was the fastest recorded in over four years.

However, a sharp rise in global energy and commodity prices due to the Russia's war in Ukraine added to cost pressure. Businesses said they had to contend with rise in petrol as well as several raw materials that led to to a marked increase in purchasing costs.

"On the flip side, cost pressures escalated during March," Mr Owen said. "However, with sales also improving, businesses were able to increase their output prices accordingly."

Oil prices have risen sharply along with other commodities that is feeding into rising inflation. Oil prices rose 67 per cent last year amid strong economic recovery and have surged further following the Russian-Ukraine conflict that is threatening to disrupt energy flows.

Brent, the benchmark for more than two thirds of the world's oil, climbed to a notch under a $140 per barrel in March. MUFG Bank on Monday said it expected Brent to average $135 per barrel in 2022 if the war in Ukraine continued.

The conflict has also muddied global economic outlook, adding to the worries of businesses that are trying to find solid footings as they emerge from the pandemic-driven slowdown.

Although Covid-19 headwinds remain and supply bottlenecks persist, economies in the Gulf region have continued to grow strongly, helped by their mass testing and vaccination programmes.

The number of Covid-19 cases in the UAE has consistently remained low. The second-largest Arab economy on Monday reported 300 new cases of Covid-19 as it cautiously continues to open up its economy and remove pandemic-related restrictions.

The PMI gauge of the UAE, which is among the highest-vaccinated countries in the world, posted 54.8 for the second month running in March, as the rate of new business growth remained close to the post-pandemic high reported in November 2021.

Panellists linked the rise in new orders to a further uplift in client demand as markets recovered from Covid-19 lockdown measures. While domestic sales were the main driver of growth, there was also a modest expansion in new export business.

However, cost pressures quickened to a 40-month high as businesses reported a particularly strong rise in the price of fuel and raw materials due to supply concerns stoked by the war in Ukraine.

"A strong rise in demand across the non-oil economy in March masked the concerning threat posed by global commodity prices," Mr Owen said.

However, despite inflationary pressures, employment levels in the non-oil private sector economy picked up, marking the tenth rise in as many months. UAE companies remained confident of a rise in business activity in the next 12 months driven by improvements in sales and overall economic conditions.

Meanwhile, the Egyptian non-oil economy recorded a deterioration in business conditions in March, amplified by cost pressures that led to decreases in output and new orders.

The Egypt PMI gauge dropped to 46.5 in March, down from 48.1 in February as Egyptian companies reduced purchases at the quickest pace in nearly two years, while employment numbers fell for the fifth month running.

"The non-oil economy was clearly hit by the effects of the Russia-Ukraine war during March, with firms often seeing clients pull new orders back amid increased prices and economic uncertainty," Mr Owned said.

"The downturn was clearest to see in industrial sectors such as manufacturing and construction."