UAE economy records strong expansion in March

The UAE’s non-oil economy recorded strong expansion in March, underpinned by sustained strong output growth.

However, the month was marred by intensifying inflationary pressures linked to rising commodity prices, according to S&P Global’s PMI survey data.

“Output and new business continued to increase sharply, although firms restricted purchasing activity as input costs picked up at the fastest rate since November 2018,” said the survey report.

The seasonally adjusted IHS Markit UAE Purchasing Managers’ Index posted 54.8 for the second month running in March. The reading was well above the 50.0 neutral mark to indicate a further sharp improvement in operating conditions.

The rate of new business growth at UAE non-oil firms was unchanged since February and remained close to the post-pandemic high seen in November 2021. Where new orders rose, panellists often linked this to a further uplift in client demand as markets recovered from COVID-19 lockdown measures.

While domestic sales were the main driver of growth, there was also a modest expansion in the new export business. The strong rise in demand fed through to a substantial increase in business activity during March, with nearly a quarter of surveyed firms signalling output growth.

As well as higher demand, marketing efforts and new product releases supported overall activity, according to panelists. At the same time, cost pressures quickened to a 40-month high as businesses saw particularly strong rises in the price of fuel and raw materials due to supply concerns relating to the war in Ukraine.

David Owen, economist at S&P Global, said a strong rise in demand across the non-oil economy in March masked the concerning threat posed by global commodity prices. “With energy and raw material costs rising around the world in response to the Russia-Ukraine war, UAE firms faced a sharp increase in purchase prices and the most marked rise in overall price pressures for more than three years.”

Owen said the uplift weighed somewhat on business pricing decisions. “While output charges continued to fall, they did so at the weakest pace for eight months. Given that the recovery in sales has been reportedly helped by price discounts since the second half of 2021, firms now face a difficult decision — whether to pass on higher costs and risk a drop-off in demand, or face a hit to their profit margins.”

After 15 months of consecutive growth, stocks of purchases were stable at the end of the quarter, said the report. At the same time, employment levels at non-oil businesses picked up, marking the tenth rise in as many months. However, despite quickening to a three-month high, the rate of job creation was still only marginal, as some efforts to cut labour costs weighed on overall hiring activity.

In Saudi Arabia, the PMI continued to signal strong growth in the non-oil economy in March, as new business and activity rose sharply in line with recovering client demand. Supply chains also displayed strength, with lead times shortening to the greatest extent for three years. In turn, companies raised their purchasing at the fastest rate since December 2017, supporting higher capacity levels.

“On the flip side, cost pressures escalated during March as commodity prices turned volatile in response to the Russia-Ukraine war. Rising petrol and raw material prices greatly added to firms’ expenses sheets. However, with sales also improving, businesses were able to increase their output prices accordingly - both costs and charges rose at the strongest rates since August 2020,” said Owen.

In Egypt, the non-oil economy was clearly hit by the effects of the Russia-Ukraine war in March, with firms often seeing clients pull new orders back amid increased prices and economic uncertainty. Output levels followed suit with the sharpest fall since June 2020 during the first global Covid-19 lockdown.

“The downturn was clearest to see in industrial sectors such as manufacturing and construction, where businesses and clients were more greatly exposed to energy and material price rises due to the war,” said Owen.

— issacjohn@khaleejtimes.com