Business activity in Egypt's non-oil economy contracts amid rising inflation

New orders fell and selling prices rose in June as cost pressures continued to mount under surging food and energy prices

Annual urban inflation in Egypt rose to 13 per cent in May. AFP

Business activity in Egypt’s non-oil economy continued to contract in June, dropping to its lowest level in the two years as new orders fell and selling prices rose amid mounting inflationary pressure.

The seasonally adjusted S&P Global Egypt Purchasing Managers’ Index dropped to 45.2 in June, from 47 in May. A reading above the neutral 50 mark indicates economic expansion while one below it points to contraction.

"Egyptian companies suffered from a sharp downturn in new business in June, leading to the strongest deterioration in economic conditions since Covid-19 measures were introduced in the second quarter of 2020,” said David Owen, an economist at S&P Global Market Intelligence.

“The sharp drop-off in demand came from rising inflation and tightening monetary policy, as the [Egyptian] central bank's decision in May to devalue the pound against the US dollar, in response to interest rate rises by the Federal Reserve, added to the cost of importing goods.”

Two of the largest components of the PMI, the output and new orders indexes, declined in June to their lowest levels since the second quarter of 2020, registering marked contractions in activity and sales, according to the survey data.

Nearly a quarter of businesses polled recorded a reduction in new order volumes at the end of the second quarter, driven by a drop in client demand caused by rising inflationary pressures.

Weaker sales were most evident in the manufacturing, wholesale and retail sectors of the country, with the services sector also experiencing a decline last month. However, the construction sector stayed relatively stable with output and new orders growing marginally.

Input costs in the North African economy rose sharply in June, with supply constraints, geopolitical headwinds and transport costs on the back of surging energy prices further increasing inflation in the country.

Inflation in Egypt has risen sharply, driven by a surge in global commodity and energy prices. Consumer prices in the Arab world's most populous country rose to their highest level in almost three years in April — about 13 per cent — as food prices surged because of higher energy prices and shipping costs as a result of the Russia-Ukraine war.

A bread seller at Al-Monira market in Cairo. Egypt, the world’s biggest wheat buyer, is grappling with higher import bills caused by Russia's continuing war in Ukraine. Bloomberg

Egypt, which is also the world's largest wheat importer, previously relied on Russia and Ukraine for about 50 per cent of its grain imports. Visitors from the two warring nations were also major contributors to Egypt's vital tourism sector, accounting for 31 per cent of all arrivals before the conflict.

In May, the Central Bank of Egypt raised its key interest rates by 200 basis points to 12.25 per cent in an attempt to contain inflation.

Survey panellists blame high import costs on the Egyptian pound’s devaluation against the US dollar.

Businesses are also facing a surge in staff wages — which have risen at the fastest pace in eight months — as companies seek to compensate workers facing a higher cost of living.

"Following this, businesses raised their selling charges at the fastest rate since February 2017, contrasting with only modest increases in the first five months of the year,” Mr Owen said.

“The sharp uptick suggested that firms were ready to pass on a greater bulk of their costs to customers amid sinking hopes that discounts would help spur a demand recovery.”

But despite cost pressures and global geopolitical headwinds, businesses were upbeat about the year-ahead outlook in June.

They showed a greater degree of confidence and overall sentiment rose to a five-month high amid hopes that business activity will start recovering soon.