UAE output growth weakens as job shedding continues

Web Report/Dubai
Filed on November 3, 2020

Firms concerned over pandemic causing further decline in activity and spending, economist says

Business conditions in the UAE non-oil private sector economy worsened for the second time in three months in October, indicating a further stalling in the economic recovery from the coronavirus pandemic, according to the UAE PMI released by IHS Markit on Tuesday.

It said new business declined for the first time since May, leading to a slower rise in output and a sharp reduction in backlog volumes. With capacity pressures remaining weak, and expectations down to a joint-record low, workforce numbers were trimmed again across the sector.

The headline seasonally adjusted IHS Markit UAE Purchasing Managers' Index (PMI) – a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy – fell to 49.5, down from 51.0 in September. The reading marked the second deterioration in business conditions in three months.

“While the decline was mild, it nonetheless showed a stalling of growth momentum after the Covid-19 lockdown. Notably, sentiment amongst businesses towards the 12-month outlook was at a joint-record low as firms remained concerned that the pandemic could further hurt activity and spending," said David Owen, economist at IHS Markit.

"Firms are notably concerned that costs will outstrip revenues, leading to a further cut to payroll numbers and a sharper fall in inventories amid efforts to free-up liquidity. On a positive note, cost inflation remains weak, in fact easing slightly on the month. This should reduce pressure on margins as selling prices continue to be lowered due to efforts to drum up sales,” he said.

A key result in the October data was a first - albeit marginal - decline in new business in five months. Surveyed firms noted that increased competition and a slow improvement in market activity led to weaker sales volumes over the month.

In addition, with the pandemic accelerating in some regions, export growth remained mild, although there were some reports of new business wins from GCC countries.

While UAE companies continued to increase output levels, the rate of expansion slowed to just a modest pace in October. Nevertheless, they were still able to lower backlogs, and did so to the greatest degree since November 2011.

With the demand falling and firms able to reduce work outstanding, latest data pointed to a further decline in workforce numbers at the start of the fourth quarter.

Companies raised their quantities of purchases solidly in October, in line with increased output requirements. Notably though, lead times on purchases lengthened for the first time since supply chains were negatively impacted by the global lockdown in May. That said, vendor performance deteriorated only slightly overall.

Input price inflation eased to a six-month low, with only a few mentions of increased purchasing costs. Staff costs fell for the first time since July, albeit only fractionally. Meanwhile, charges were lowered at the slowest rate in four months, despite several panellists noting increased efforts to deal with tight market competition.

Lastly, the overall degree of sentiment regarding the 12-month outlook for activity slipped back on the previous month, and was the joint-weakest in the survey history (level with August) as the pandemic continued to weigh on firms’ spending plans.

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