Business costs soar to 11-year high on surging fuel prices

Inflationary pressures were widespread across the UAE non-oil economy at the halfway point of 2022 with rising fuel prices leading to escalation in business costs to 11-year high in June.

While new orders continued to rise sharply amid price promotions, input costs rose at the fastest pace for 11 years, leading to a slowdown in purchases and reduced stockpiling efforts, latest S&P Global PMI data showed.

As a sharp uptick in fuel prices led to a severe increase in business expenses and efforts to secure staff through higher wages, firms continued to see a robust increase in new orders in June, driving a strong expansion in activity. It was helped in part by sustained efforts to lower output charges and offset competitive pressures.

“Optimism that demand would remain strong despite inflationary pressures also boosted confidence for the year ahead, as output projections improved to the highest since October last year,” the S&P Global UAE Purchasing Managers' Index report said.

The PMI, a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy, posted firmly above the crucial 50.0 mark in June, but dropped from 55.6 in May to 54.8.

“The performance of the non-oil sector has improved in each of the past 19 months, helped by a recovery in economic conditions following the lifting of Covid-19 restrictions. The recovery continued to support a sharp rise in new order volumes in June, with 21 per cent of survey respondents reporting growth since the previous month,” it said.

David Owen, economist at S&P Global Market Intelligence, said businesses came under increased pressure from rising input costs in June, as a surge in fuel prices drove the fastest rate of cost inflation in exactly 11 years. “More than twice as many surveyed firms indicated a rise in their expenses compared to May, leading many to curb spending on inputs.”

"Nevertheless, the latest data suggested that firms were unwilling to pass higher costs on to customers in June, as output charges were reduced at the fastest rate in over a year-and-a-half. According to panellists, the threat of strong competition led them to offer price discounts to protect their sales,” said Owen.

He noted that while firms remained positive about future activity, the survey data suggested that they are unlikely to maintain cost margins at the current level. “The ratio between the Input Price and Output Price Indices was the highest on record, signalling that price rises for customers are likely in the coming months."

Businesses were helped by a solid upturn in new work from abroad. After reaching a six-month high in May, the pace of sales growth nonetheless slowed to the weakest since January, as some panellists noted that strong competition had weighed on client orders. In addition, some firms mentioned that rising interest rates in response to global inflationary pressures had hit household and business spending, said the report.

However, there was some evidence that companies had to offer higher salaries to hire and retain staff, as average wages rose at the fastest pace for over four years. Inflationary pressures also hit purchasing activity in June, which rose only marginally and at the weakest rate in a year, the report noted. — issacjohn@khaleejtimes.com

• Dubai