Saudi Arabia's non-oil sector continues to improve on strong output and new orders

Business activity in the non-oil private sector economy of Saudi Arabia continued to improve in September as output and new orders rose sharply on robust demand, despite inflation concerns and global macroeconomic headwinds.

The kingdom's seasonally adjusted S&P Global purchasing managers’ index reading stood at 56.6 in September. Although down from 57.7 in August, the headline PMI reading signalled an improvement in the health of the country's non-oil private sector economy for the 25th successive month.

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

“Saudi Arabia's non-oil private sector economy retained an impressive pace of growth during September, especially against the backdrop of increasingly challenging global economic conditions,” said David Owen, an economist at S&P Global Market Intelligence.

“Both output and new orders rose at rates above their averages for their current 25-month growth sequences.”

Output and new orders, two key components of the headline PMI, remained firmly inside the positive territory in September and maintained a robust pace of expansion.

Businesses surveyed underscored the “positive interaction between demand and production” that helped orders to rise at the end of the third quarter and drove overall output higher.

Sales and production also rose for the 25th consecutive month, with sector data indicating broadly consistent gains across the non-oil private sector economy, according to the survey.

“Confidence in the quality of goods and services … meant firms expect to successfully convert into hard contract wins a high proportion of what is an extremely positive pipeline of new business,” Mr Owen said.

The sustained improvement in production and demand drove purchasing activity. Growth was marked, albeit down on August's seven-year high, as business sought to maintain inventory levels at a time of high “current and expected sales demand”.

The latest data indicates continued job creation in the kingdom's non-oil private sector economy, though at a slower pace as work backlogs fell for a fourth month in a row.

Although marginal, the growth in employment marked the sixth consecutive month of increase in staffing levels.

Businesses surveyed “retained a high degree of confidence” for continued rise in production levels over the next 12 months. The upbeat sentiment was driven by expectations of a continued strong sales and a strong pipeline of new work despite global macroeconomic headwinds and inflationary pressures.

Saudi Arabia’s economy grew by 12.2 per cent in the second quarter, exceeding initial estimates and registering the fastest expansion in more than a decade on the back of higher oil prices.

The annualised real gross domestic product growth in three months to the end of June was the quickest since the third quarter of 2011, the kingdom’s General Authority for Statistics (Gastat) said last month.

Oil-related economic activity in Saudi Arabia, Opec’s biggest crude producer, jumped by about 23 per cent on an annual basis in the second quarter. Non-oil economic activity rose 8.2 per cent, revised higher by Gastat from its 5.4 per cent flash estimates.

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.

Saudi Arabia’s GDP is forecast to expand 7.6 per cent this year after 3.2 per cent growth in 2021, the IMF said in its World Economic Outlook update in July. The kingdom's non-oil growth will increase to 4.2 per cent in 2022 before returning to its medium-term potential of 4 per cent.

Saudi investment bank Jadwa Investment forecasts the kingdom's economy will grow 8.7 per cent this year after its economy showed strong expansion in both oil and non-oil activities in the first half of 2022.

In its latest Interim Economic Outlook released last week, the Organisation for Economic Co-operation and Development (OECD) projects the kingdom's economy may expand as much as 9.9 per cent this year.

September's PMI data shows that the kingdom's non-oil private sector businesses recorded another month of solid input price inflation. Staffing costs increased, but only marginally and at the slowest rate since June, while construction companies reported by far the biggest rise in costs in September.

Purchasing cost inflation was the principal driver of higher overall operating expenses, as prices of globally-sourced raw materials and oil-related products rose again, according to the survey.

Inflation in Saudi Arabia has stayed low, compared with most advanced economies, amid a rise in per capita income.

GDP per capita in the kingdom surged in the April to June quarter, rising 44.6 per cent on an annual basis to 29,819 Saudi riyals ($7,941), according to Gastat.

The IMF expects inflation to remain contained at 2.8 per cent in 2022 as the kingdom’s central bank tightens policy in line with the US Federal Reserve.

Consumer prices in Saudi Arabia increased by 3 per cent on an annualised basis, higher than the 2.7 per cent rate of inflation recorded in August, Gastat said. They are markedly lower than multi-decade inflation rates in OECD countries.

Meanwhile, business activity in Egypt's non-oil private sector economy remained under pressure from inflation, energy rationing, import restrictions and weak demand at the end of the third quarter.

Egypt's PMI index reading in September was pegged to its August level of 47.6, its joint-weakest performance in seven months.

“Non-oil activity in Egypt continued to suffer from weak demand, geopolitical tensions and surging inflation in the final month of the third quarter,” Shreeya Patel, an economist at S&P Global Market Intelligence, said.

“The energy crisis — brought about by Russia's war on Ukraine — led to sharp uplifts in energy costs and the introduction of energy rationing policies.”

Unfavourable pound-dollar exchange rate movements also added to “already steep price pressures”, she added.