Business confidence in Saudi Arabia hits two-year high as output strengthens

Cost and inflation in the Arab world's largest economy ease in January

The Riyadh skyline. Optimism among businesses in the kingdom is on the rise in January with an ongoing improvement in the business environment, private-sector employment, and increased foreign investment with governance and labour market reform. ReutersShow less

Business confidence in the non-oil economy of Saudi Arabia hit a two-year high in January as output growth in the kingdom strengthened.

The reading for the Arab world's largest economy on the Riyad Bank purchasing managers' index rose to 58.2 in January from 56.9 in December, well above the neutral 50 mark that separates growth from contraction.

The reading was the second-highest recorded since September 2021, following the recent high in November, driven by an acceleration in growth of output, new orders and stocks of purchases.

"Saudi Arabia is continuing its strong performance and outperformed the global economic trends for activity and demand," said Naif Al-Ghaith, chief economist at Riyad Bank.

"The non-oil sector is starting this year with a strong headline growth ... this growth confirms the Saudi position as the fastest-growing economy among the Group of 20 countries despite economic headwinds."

Saudi Arabia's economy grew 8.7 per cent in 2022, boosted by a sharp increase in the kingdom's oil and non-oil sectors, according to initial government estimates.

A 15.4 per cent rise in oil sector activities — which include the production of crude, natural gas and refining operations — drove the sharp increase in gross domestic product, data from the General Authority for Statistics (Gastat) showed.

Non-oil activities increased by 5.4 per cent during the 12-month period to the end of December while government services activities were up 2.2 per cent, Gastat said.

According to the latest PMI survey new order inflows continued to rise at a marked pace in January, as businesses cited improving demand conditions and stronger client orders. The rate of increase quickened from December and was the second-sharpest in 16 months.

Demand from foreign clients increased and was greater than at the end of 2022, with around a third of all surveyed companies seeing an uplift on the month.

The PMI survey also showed that purchasing activity increased sharply and supply chains showed further signs of improvement, whilst inflationary pressures on both costs and charges softened from December.

Overall cost pressures were subdued and the softest for three months as staff costs were up only fractionally. As a result, businesses raised their output prices only slightly and at the weakest rate in nearly a year.

The kingdom's inflation rate for 2022 was estimated at 2.6 per cent and, according to preliminary forecasts, has been forecast at 2.1 per cent in 2023, Saudi Finance Minister Mohammed Al Jadaan said in December.

Inflation is expected to soften in the upcoming months with the reduction in input cost pressures and the continued improvement in supply chains, Mr Al-Ghaith of Riyad Bank said.

"We have started to see weaker increases in output prices corresponding with input costs. The rise in output prices was the softest in nearly a year, despite the growth in new orders which remained marked in January.”

Looking ahead, surveyed businesses gave a stronger projection for activity levels in the upcoming year, with optimism picking up to the highest level since January 2021, as panellists expect demand growth to continue and market conditions to improve.

Meanwhile, the PMI survey for Egypt, the Arab world's third largest economy, recorded a sharp contraction in operating conditions in January as output prices increased at sharpest pace in almost six years as the country's currency depreciated.

The seasonally adjusted S&P Global Egypt Purchasing Managers’ Index reading slipped to 45.5 last month from 47.2 in December, indicating a sharp deterioration in the health of the non-oil sector that was one of the quickest seen in the current 26-month sequence of decline, according to the survey..

The rapid depreciation of the Egyptian pound against the US dollar, compounded cost woes for domestic firms with purchase price inflation reaching its highest since July 2018, according to the survey.

The purchasing costs of half of all surveyed businesses increased since the end of last year.

This led to a robust and quicker rise in overall expenses with businesses raising their output prices substantially in January, leading to inflation picking up to the fastest rate seen for almost six years, according to the survey.

"Another marked depreciation of the Egyptian pound against the US dollar in January added to gloomy inflation forecasts at the beginning of 2023," said David Owen, senior economist at S&P Global Market Intelligence.

"The latest PMI survey data showed purchasing costs increasing at the sharpest rate in four-and-a-half years, as the pound's depreciation drove a further rise in import fees," Mr Owen said.

"The surge in costs led to the largest rise in selling prices at non-oil firms since February 2017, suggesting that inflation could climb further from December's 21.3 per cent and remain elevated throughout much of the year."

The Central Bank of Egypt raised interest rates by 800 basis points last year to fight inflation. Last week, the CBE left interest rates unchanged following a rate increase by the US Federal Reserve, adopting a more cautious approach given the scale of rate increases it implemented in 2022.