Saudi and UAE non-oil business activity improves in August despite inflation fears

Rising demand bolstered new business activity in Arab world's largest economies

The Abu Dhabi skyline. Non-oil business activity in the UAE improved in August amid sharp uplift in new order volumes. Khushnum Bhandari / The National

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE recorded a sharp improvement in August as rising demand bolstered new business activity despite mounting concerns of a global economic slowdown amid inflationary pressures.

Saudi Arabia's seasonally adjusted S&P Global purchasing managers’ index climbed to 57.7 in August, from 56.3 in July, the highest level since October 2021, as new business growth hit a 10-month high.

The headline index also climbed above its series average of 56.8, indicating an improvement in business conditions in the Arab world's largest economy for the 24th month in a row.

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

“The Saudi Arabia PMI pointed to added resilience in the non-oil economy during August, as business activity and sales continued to rise sharply despite reports of mounting global economic distress,” said David Owen, an economist at S&P Global Market Intelligence.

“Total new orders rose at the quickest pace since October last year, driven by improving client demand, higher exports and a broad recovery in economic conditions since the pandemic.”

Businesses were also helped by a “slight softening” of input price pressures, allowing some companies to cut output charges in a bid to attract higher sales, he said.

Output, new orders, stocks of purchases and employment in the kingdom, all improved midway through the third quarter of the year.

Non-oil output continued to increase, with the pace of growth picking up from the previous month.

Survey panellists suggested that output mainly increased due to increasing new business inflows, which, in turn, were supported by improving demand conditions.

The latest increase in the volume of new orders was the quickest in 10 months, helped by another strong improvement in new export orders.

By sector, new work rose at the fastest pace in the wholesale and retail industry, with expansion also recorded in manufacturing, construction and services, according to the survey.

The sustained improvement in non-oil business activity led to companies expanding their input purchases in August, with rate of growth climbing to its sharpest in seven years. Businesses built up stocks in anticipation of further sales growth.

Employment levels in the kingdom rose for the fifth successive month in August, although marginally, according to the survey.

Business confidence remained firmly upbeat in August, reflecting expectations that strong new order growth will continue despite mounting global economic pressures.

The degree of optimism was one of the strongest over the past 18 months.

Saudi Arabia’s economy grew by 11.8 per cent in the second quarter of 2022, with oil-related economic activity in the kingdom rising 23.1 per cent annually.

Non-oil economic activity improved 5.4 per cent in the April-June quarter, according to General Authority for Statistics (Gastat) data.

The kingdom's economy is set to grow at the quickest pace in a decade and could be one of the world’s fastest-growing economies this year, the International Monetary Fund said in August.

It is expected to expand 7.6 per cent this year after growing by 3.2 per cent in 2021, the IMF said in its World Economic Outlook update in July.

Non-oil growth will increase to 4.2 per cent in 2022 before returning to its medium-term potential of 4 per cent.

While businesses surveyed indicated a slowdown in both input cost and output price inflation in August, fuel costs remained a key challenge. The overall increase in input costs was solid, although “the least marked since May”.

A rise in hydrocarbon prices and a sharp increase in European energy prices amid Russian gas supply disruptions have added to economic headwinds.

Inflation in the US, the UK and some other advanced economies is at its highest in decades amid Russia's continuing military assault in Ukraine.

Global inflation has been forecast at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies, according to the IMF. However, it is significantly lower in both Saudi Arabia and the UAE.

Consumer prices in Saudi Arabia increased by 2.7 per cent on an annual basis in July, according to Gastat data.

Inflation in the UAE is also relatively low. It remained at 3.3 per cent in the first quarter and is expected to average 2.7 per cent in 2022, according to the UAE Central Bank.

The UAE PMI Index posted a reading of 56.7 in August, up from 55.4 in July, marking the quickest rise in business activity since June 2019.

The rate of sales growth was the second fastest in more than three years.

Non-oil business growth in the Emirates signals a “robust improvement in business conditions” as “sales growth picked up even further, supported by additional efforts to provide discounts to clients”, Mr Owen said.

Businesses surveyed linked output growth to a sharp uplift in new order volumes in August as client demand improved. While domestic sales remained strong, new export business rose only marginally last month.

With purchase costs falling and output requirements growing, companies sharply expanded their input buying midway through the third quarter, with stock levels rising at the fastest pace since August 2020.

Employment increased for the fourth straight month to the strongest level in a year as businesses hired more workers to finish backlogs amid the continued economic bounce back.

The UAE economy is set to expand by an annual 5.4 per cent this year, according to the Central Bank.

The IMF projects that the UAE economy will grow 4.2 per cent in 2022 while Japan's largest lender MUFG expects it to grow 4.9 per cent.

The Egyptian non-oil economy registered a softer decline in operating conditions in August as inflationary pressures eased slightly, leading to slower decreases in output and new orders.

Egypt's PMI index reading climbed to 47.6 in August, from 46.4 in July, its highest level since February.

“August saw the key PMI metrics move in the right direction, with the headline index up for the second month running, while price gauges continued to fall from their recent peaks,” Mr Owen said.

“The latest rise in input costs was much softer than in July, supporting a slower uplift in output prices that should ease the burden on consumers over the coming months.”