Business activity in Arab world's largest economies continued to improve in January

The non-oil economies of Saudi Arabia and the UAE grew but at a slower pace amid a surge in Omicron infections

The Riyadh skyline. Business activity in the non-oil private sector economy of the kingdom continued to expand in January. Reuters

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE continued to expand in January, although at a slower pace amid a rise in Omicron cases and softer demand growth.

The seasonally adjusted Saudi Arabia Purchasing Managers’ Index posted a reading of 53.2 in January, down from 53.9 in December, but signalled a solid improvement in the health of the non-oil private sector of the Arab world’s largest economy.

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

A rise in Covid-19 cases led to “increased hesitancy” among businesses and customers, which culminated in a weaker new business growth in January, IHS Markit said in its latest PMI survey on Thursday.

The rate of new order growth softened for the fourth consecutive month and was the slowest recorded since October 2020.

Businesses surveyed said some of their clients withheld orders due to uncertainty about the economic impact of the new coronavirus variant. A slowdown in travel amid the recent surge in cases also affected demand.

New orders from foreign customers also fell for the first time since last March, although only marginally.

“Customer demand in the non-oil sector was quelled by the Omicron variant at the start of the year, leading to slower rises in activity and new business and the softest improvement in business conditions since October 2020,” IHS Markit economist David Owen said.

“Export sales decreased … as companies also blamed high costs for global shipping and transport.”

Coronavirus infections have risen around the world after the detection of the more transmissible Omicron strain in South Africa in November.

The number of cases worldwide now exceeds 385 million, with deaths rising above 5.7 million, according to Worldometer, which tracks the pandemic. More than 305 million people have recovered from the infection.

The unabated spread of Omicron has forced countries, particularly in Europe and Asia, to impose fresh movement restrictions to curb the pandemic.

However, those curbs are slowly being rolled back as deaths and hospital admissions remain low.

Despite global headwinds and continued pandemic-linked uncertainty, input pressures moderated at the start of the year, with the latest data indicating the softest increase in total expenses since last August. Purchase prices rose only modestly.

Companies in the kingdom were able to reduce backlogs at the quickest pace since July last year despite staff shortages due to Covid-19.

Optimism around the outlook for business in the year ahead improved in January after it dropped to an 18-month low at the end of 2021. The buoyant sentiment was underpinned by expectations that a recovery from the pandemic will lead to stronger new business growth and a stabilisation of global markets.

Meanwhile, the sharp rise in economic activity in the UAE’s non-oil private sector slowed from its December high but remained strong overall. The UAE gauge, which gives a snapshot of business activity, stood at 54.1 in January, down from 55.6 in December.

Business activity was boosted by strong sales generated by Expo 2020 Dubai, alongside a broad recovery in economic conditions from the pandemic.

The latest survey data showed a sharp rise in new work led to a further marked expansion in output across the non-oil sector.

However, after reaching near-record highs at the end of 2021, there were signs that growth had begun to slow down, with rates of expansion in both business activity and sales softening to four-month lows.

This was partly due to a rise in Covid-19 cases, the survey said.

“The UAE's non-oil sector entered 2022 on a strong footing as businesses continued to enjoy the benefits of a recovery in economic conditions and increased demand from the Expo,” Mr Owen said.

“The latest data further solidified this footing”, but showed signs that growth has tailed off, he said.

The surge in Covid-19 cases also tapered the rebound in the UAE's tourism sector in January. However, the sector could quickly “recoup this momentum in the coming months as the Omicron wave appears shorter than previous ones”, Mr Owen said.

Other challenges such as stronger inflationary pressures and global supply chain problems remain, he said.

Business outlook in the UAE also improved, with companies signalling stronger growth forecasts than what was recorded on average throughout 2021 amid expectations of a broader recovery in demand.

However, the January PMI data in Egypt signalled a deceleration in business activity, underpinned by weaker client demand and inflationary pressures. Output levels fell at their strongest pace in more than 18 months, while new business volumes fell at a faster rate than in December.

The PMI gauge fell to 47.9 in January, from 49 in December, the lowest level since April 2021. The reading was also below the series average of 48.2 and indicated a solid decline in overall business conditions.

“Egypt's non-oil economy had a disappointing start to the year, as weak demand conditions led to stronger declines in output and new business,” Mr Owen said.

However, businesses surveyed remained “largely confident that they would weather the current economic storm and see activity increase over the next 12 months”, he said.