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UAE: Rising fuel prices spur marked increase in business costs, says survey

Input costs rose at the fastest pace in 11 years

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Inflationary pressures were widespread across the UAE non-oil economy at the halfway point of 2022, the latest 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.

Input costs rose at the fastest pace in 11 years, leading to a slowdown in purchases and reduced stockpiling efforts.

Nevertheless, it helped in part by sustained efforts to lower output charges and offset competitive pressures, firms continued to see a robust increase in new orders in June driving a strong expansion in activity.

The headline seasonally adjusted S&P Global UAE Purchasing Managers' Index (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. As well as reports of stronger domestic demand, businesses were helped by a solid upturn in new work from abroad.

"UAE 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,” said David Owen, Economist at S&P Global Market Intelligence.

"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,” said Owen.

“According to panellists, the threat of strong competition led them to offer price discounts to protect their sales. 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," he said.

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Sales growth

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.

However, with companies facing strong competition, output prices were in fact reduced for the second month running, and to the greatest extent since late 2020. Despite some efforts to pass on increased cost burdens, a higher proportion of firms offered discounts to their clients.

Staff, wages increase

The latest survey data meanwhile signalled a marked increase in activity at the end of the second quarter, which led businesses to expand their staffing levels. However, there was some evidence that companies were having 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. Whilst higher spending reflected new order growth, several panellists eased back on stockpiling efforts due to rising material and transport prices. Shorter lead times continued to support spending, although the latest improvement in supplier performance was the softest for eight months.

Finally, the outlook for future activity improved for the second straight month in June to the strongest in eight months. Despite some fears that inflation will hit spending, firms were generally hopeful of a continued recovery in demand from the pandemic.

-waheedabbas@khaleejtimes.com

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