Non-oil business activity in Saudi Arabia and UAE continues to improve in July

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE continued to improve in July, with a strong increase in output, new orders and employment despite a rise in inflationary pressures. The headline seasonally adjusted S&P Global Saudi Arabia Purchasing Managers’ Index posted 56.3 in July, slightly lower than 57 in June, but signalled a robust improvement in business conditions for the 23rd 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 remained firmly in growth territory in July. New business continued to rise substantially, helped by recovering demand and strengthening export sales,” David Owen, an economist at S&P Global Market Intelligence, said. “Output expanded sharply and employment numbers rose at the fastest pace since September 2019, following a period of weakness in labour markets since the Covid-19 pandemic began.” Although the expansion in the kingdom's non-oil businesses activity was slightly softer than at the end of the second quarter, five times as many companies saw an increase in activity month-on-month compared with those that recorded a decline. Businesses surveyed attributed the expansion mainly to higher sales, new projects and stronger marketing. New work intake in the kingdom also rose markedly in July, with the latest upturn being the second-quickest in eight months. Improving market conditions at home and strengthening new export orders that rose at the sharpest pace since November helped the growth momentum at the beginning of the third quarter. With new orders increasing rapidly, businesses were encouraged to raise employment levels further in July, extending the current period of growth to four months. The pace of job creation in the kingdom was the quickest since September 2019. Backlogs of work also decreased at the start of the third quarter, with the sharpest rate of decline in just over two years. Efforts to complete unfinished orders were helped by a rise in buying activity, as businesses expanded inventories to cope with stronger demand. Demand continued to pick up across the non-oil sector amid optimism for future economic growth. Business confidence in July remained one of the strongest seen since the pandemic began. 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 climbed 5.4 per cent during the period, supporting the growth of the Arab world’s largest economy, according to flash estimates released by the kingdom’s General Authority for Statistics (Gastat) last week. The International Monetary Fund estimates that the Saudi economy will expand by 7.4 per cent this year, driven by higher oil revenue, a projected improvement in the country's non-oil gross domestic product and its efforts to diversify the economy. The World Bank estimates that the country's economy will grow 7 per cent this year while Jadwa Investment expects the economy to expand 7.7 per cent in 2022. However, cost pressures continued to increase in July, with the rate of inflation remaining the second-quickest since August 2020. Businesses said rising oil and material prices were the main drivers of rising costs. Staff wages rose at the sharpest pace since February 2018. Surging energy prices and supply shortages amid Russia's continuing military assault in Ukraine have affected raw material prices around the world. Inflation globally has risen sharply amid a steep rise in the prices of food and other commodities since the Ukraine conflict began in February. For 2022, global inflation is forecast at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies, according to the IMF. Inflation in Saudi Arabia was 2.3 per cent higher in June on an annual basis, Riyadh-based Jadwa Investment said. Inflation in the UAE is also relatively low. It remained at 3.3 per cent in the first quarter and is projected to average 2.7 per cent for 2022, according to the Central Bank of the UAE. The UAE PMI Index posted 55.4 in July, up from 54.8 in June, the joint-quickest rise in business activity this year as it stayed above the long-run average of the survey. Panellists indicated that favourable demand conditions, competitive pricing, marketing efforts and expanded clientele drove new business intakes higher in July. International demand for UAE non-oil output also increased at the start of the third quarter with the rate of expansion broadly similar to that seen in June. Businesses also scaled up output in July at the joint-fastest rate in 2022. “UAE non-oil companies started the third quarter on a stronger footing,” Mr Owen said. “The current run of output expansion is now approaching its second year, a remarkable performance when considering lingering global headwinds.” In response to improved demand and rising backlogs, companies continued with their hiring efforts, with employment increasing slightly from June levels. The UAE economy is set to expand by an annual 5.4 per cent this year, driven by the country’s success in containing the health and economic impact of the pandemic, according to the Central Bank. The IMF projects that the UAE economy will grow 4.2 per cent this year while Japan's largest lender MUFG expects it to grow 4.9 per cent. Businesses in the Egyptian non-oil economy, however, saw weaker performance in July, as output and new orders declined, albeit at slower rates compared to June. Egypt's PMI index reached 46.4 in July, up from its two-year low of 45.2 in June. The improvement in the index was the biggest seen in just over a year, but it remained well below the 50 neutral mark. “The Egypt PMI recorded a modest uptick in July … to signal a softer decline in the health of the non-oil economy,” Mr Owen said. “While output continued to fall in response to weakening new orders, the rate of contraction slowed for the first time since April.” Employment levels also stabilised in the most populous Arab country, while input and output price inflation softened markedly in July, according to the survey.

Non-oil business activity in Saudi Arabia and UAE continues to improve in July

New orders rose significantly along with employment despite a rise in cost pressures