Business activity in Arab world's largest economies improves in May as vaccinations boost confidence

Business activity in the non-oil private sector of the Arab world’s two biggest economies continued to expand in May as rising confidence amid roll out of Covid-19 vaccination at pace boosted new orders and domestic demand.

The IHS Markit Saudi Arabia Purchasing Managers' Index rose for the second month in a row to 56.4 in May from 55.2 in April. A reading above the 50-mark is an indicator of economic expansion while anything below points to a contraction.

The reading indicated a robust improvement in business conditions that was the fastest recorded since January, according to the survey.

A rise in the output Index propelled the expansion of the kingdom’s non-oil economy in May. The latest expansion in output was the quickest since December 2017.

"Saudi Arabia's non-oil sector continued to enjoy a strong recovery in May, led by a sharp rise in output," David Owen, an economist at IHS Markit, said. "Firms often cited growth in new business and a notable pick up in export sales."

Firms surveyed in the kingdom attributed a rise in customer orders to improved market conditions following looser pandemic-related restrictions. Export orders also rose to the highest level since the end of 2015 as global demand strengthened.

To meet the rising demand, businesses in the kingdom increased inputs for the eighth successive month in May, with the rate of growth quickening to a 17-month high.

"Most firms continued to operate with unchanged workforce numbers, suggesting a focus on boosting productivity back to pre-Covid levels," Mr Owen said. "On the plus side, inventories were increased at the quickest pace in a year-and-a-half as firms prepare for a further recovery in demand over the coming months."

Business sentiment in the kingdom jumped to the highest level in three months, as firms were hopeful of a further recovery from the pandemic.

The IHS Markit UAE PMI posted 52.3 in May, pointing to a moderate improvement in business conditions and the sixth in as many months. The index was down slightly from 52.7 in April, however, the overall growth was still the second-fastest since August 2019.

The latest data pointed to solid expansions in output and new business in May. New orders rose with improving domestic sales on the back of rising confidence surrounding the Covid-19 pandemic.

Business activity in the UAE was scaled up in May to accommodate for the overall rise in sales.

The non-oil private sector showed further signs of improvement in May, with new orders largely supported by domestic sales, Mr Owen said.

The employment number fell slightly in the May, but with backlogs rising and demand strengthening, "it is hoped that businesses will start to raise their staffing levels soon to support overall growth," he added.

Expectations of a rise in businesses activity in the UAE over the next 12 months amid continued recovery from Covid-19, boosted business sentiment in May for the sixth month on a trot to the highest level since July 2020.

Both Saudi Arabia and the UAE have eased pandemic-related restrictions as they continue their Covid-19 vaccination programmes at speed.

The UAE has administered more than 13.1 million doses of vaccines, enough to vaccinate almost 61 per cent of the country's population. In Saudi Arabia, 14.5 million shots have been administered, enough for more than 21 per cent of the kingdom's population, according to Bloomberg's vaccine tracker.

Egypt's PMI rose to 48.6 in May from 47.7 in April, underpinning a sixth consecutive monthly decline in the health of the non-oil sector, led by decreases in output and new business.

The overall drop in business output in the Arab world's third largest economy was the softest recorded since February, and firms surveyed were more confident about future output, as business sentiment rose to strongest level in more than three years.

Despite remaining in contraction territory Egypt's PMI is "a slight step towards stability," Mr Owen said.

"Business expectations data offered a glimpse of a positive future, as firms were at their most optimistic since early 2018 and expectant of a strong recovery in business conditions to follow soon."