Business activity in UAE continued to improve in December amid Expo boost

The latest PMI reading rounds off a strong year for the country's non-oil private sector

A Christmas tree at Al Wasl Plaza at Expo 2020 Dubai. The world's fair has fuelled the country's non-oil economic growth Reuters.

Business activity in the UAE's non-oil private sector continued to improve in December as a sharp rise in new business and output, and a boost from Expo 2020 Dubai combined to round off a strong year.

The seasonally adjusted purchasing managers' index – a gauge designed to give a snapshot of operating conditions in the non-oil private sector economy – stood at 55.6 in December, down slightly from November's 29-month high of 55.9.

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

The latest data by IHS Markit underpinned business activity growth at a marked pace throughout the fourth quarter amid the start of the Expo and due to an easing of restrictions in the Arab world’s second-largest economy.

"The PMI remained close to its recent peak … showing that the benefits to the economy from Expo 2020 and the loosening of Covid-19 measures had remained strong throughout the final quarter of the year,” IHS Markit economist David Owen said.

New orders continued to rise in December, although the rate of growth eased to a three-month low.

Businesses surveyed attributed the rise in sales growth to a substantial jump in travel due to Expo 2020 and strong demand from clients.

About 25 per cent of respondents reported an increase in output from November. New export orders also expanded, although the upturn slowed, according to the latest data.

"New work volumes rose sharply, supporting the fastest upturn in business activity for almost two and a half years," Mr Owen said.

Businesses marginally increased their workforce in December, reflecting a further recovery in employment.

However, they still struggled to keep up with demand, leading to a sixth successive monthly increase in backlogs.

While demand remained strong in December, businesses also reported a much sharper increase in input prices, with those surveyed attributing it to a rise in fuel and energy costs and higher raw material prices.

Purchase costs last month rose at their fastest pace since March and inflationary pressures led businesses to limit their purchasing activity.

Companies are facing the "prospect of higher inflation" and the next few months may prove "more challenging", depending on how the Omicron coronavirus strain affects global travel and local restrictions, Mr Owen said.

The Omicron variant has led to an increase in infections, with the number of cases rising sharply in parts of Europe and Asia and the Americas. Europe is reporting near vertical rises in infections as the new strain spreads across the continent.

The number of cases worldwide now exceeds 295 million, with deaths rising above 5.4 million, according to Worldometer, which tracks the pandemic. More than 256 million people have recovered from the disease.

The rapid spread of the more infectious variant has forced many countries to impose new restrictions to curb the pandemic, raising questions on demand growth and the pace of the world's economic recovery this year.

New work volumes rose sharply, supporting the fastest upturn in business activity for almost two and a half years

David Owen,
economist, IHS Markit

The UAE has also reported a rise in infections in recent weeks, with about 2,500 new cases a day. However, its mass testing and inoculation campaign has kept the pandemic in check.

Authorities administered 18,821 doses of Covid-19 vaccine on January 4 alone, pushing the number of vaccines administered so far to more than 22 million.

Despite the headwinds, businesses are optimistic that the strong economic growth trend will continue.

The UAE economy has made a strong recovery from the pandemic-induced slowdown. Emirates NBD, the biggest lender in Dubai, estimates that the UAE's non-oil sector grew by 3.5 per cent in 2021, with a growth of 4 per cent expected this year.

“Even with the lower December PMI reading, the average PMI for Q4 [fourth quarter of] 2021 was the highest since Q2 [second quarter of] 2019, which supports our view that the UAE economy likely saw faster GDP growth in the final quarter of last year,” Emirates NBD said in a note on Wednesday.

“The UAE’s high vaccination rate and relatively young population stand it in good stead to be able to withstand the current wave of infections without needing to reimpose the strict measures.”

Overall, economic output is forecast to expand 4.2 per cent in 2022, according to the UAE Central Bank's second-quarter review.