Boon for Arab world's largest economies as non-oil sectors improve further

Pace of economic momentum in Saudi Arabia and the UAE continues to pick up

The Abu Dhabi skyline. Business activity in the UAE and Saudi Arabia's non-oil private economies continued to expand in April. Photo: DCT Abu Dhabi

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE continued to improve in April on higher output and new orders.

The reading for Saudi Arabia, the Arab world's largest economy, on the Riyad Bank purchasing managers' index hit 59.6 in April, from 58.7 in March.

This was well above the neutral 50 mark that separates growth from contraction, as new orders in the kingdom rose at their fastest pace in more than eight and a half years.

New orders increased at the fastest rate since September 2014 as stronger domestic demand offset a slight drop in export sales, while job creation also continued in April, marking the 13th consecutive monthly rise in total employment numbers.

Customer demand was buttressed by rising tourism numbers and higher consumer spending, as well as new business opportunities related to major infrastructure projects in the kingdom, according to businesses surveyed.

“Long-term business expansion plans have made the rate of job creation slightly stronger than seen on average in the first quarter of 2023,” said Naif Al-Ghaith, chief economist at Riyad Bank.

Despite growing cost pressures — due to both input prices and staff wages rising again, while raw materials appreciated due to the recent weakness in the US dollar — future output expectations were still optimistic.

“Positive sentiment reflected strong sales pipelines, alongside confidence regarding domestic business conditions and the long-term impact of government economic policy objectives,” Mr Al-Ghaith said.

“After all, it seems that the economy can weather additional interest rate hikes to come this year, especially as the labour market remains very strong and businesses continue to display strong performance.”

Saudi Arabia was fastest-growing G20 economy in 2022, expanding by 8.7 per cent last year on higher oil prices and the strong performance of its non-oil private sector.

Increased government spending, as part of the kingdom's investment strategy under Vision 2030, is helping to boost non-oil gross domestic product growth and job creation.

Saudi Arabia's non-oil economy will continue to gain traction, with a growth of 5 per cent expected in the non-oil private sector this year.

This will be supported by higher government capital expenditure, Public Investment Fund projects, robust credit growth, the continued development of the retail and entertainment sectors and employment gains among Saudis and residents, according to Fitch Ratings.

Meanwhile, business activity in the UAE’s non-oil private sector registered a “robust improvement” last month, driven by the fastest growth in new business since November 2021.

The seasonally adjusted S&P Global purchasing managers’ index of the Arab world's second-largest economy, climbed to 56.6 in April, from 55.9 in March, as businesses raised output sharply and increased their inventories and staffing levels to meet improved customer demand driven by receding cost pressures.

The index reading for the Emirates was slightly shy of its post-coronavirus peak of 56.7 recorded in August last year.

Improving UAE market conditions and rising client demand underpinned a strong sales performance in April, according to the survey.

About 30 per cent of businesses surveyed said they registered a sharp increase in new orders from the previous survey period, while 7 per cent reported a decline.

Output levels across the non-oil economy of the Emirates expanded at the sharpest rate in six months in April, as a steep rise in new work boosted activity growth.

Despite the rate of job creation being slightly slower than March's near seven-year record, the survey pointed to a rise in employment that was stronger than the long-run trend.

“Companies maintained their efforts to build capacity levels, resulting in another marked expansion of input stocks. Employment numbers also grew,” said David Owen, a senior economist at S&P Global Market Intelligence.

“Rising demand and rapid capacity improvements helped to drive confidence towards future activity higher for the fourth successive month and to its strongest level since September 2022.”

Expectations that demand will continue to rise sharply meant that optimism towards future activity picked up in April and was at its highest in seven months, according to the survey.

Improving economic conditions and an increase in construction activity and marketing spending were also cited as reasons for the upbeat forecasts.

The UAE economy is estimated to have grown by 7.6 per cent last year, the highest in 11 years, after expanding by 3.9 per cent in 2021, according to the country's Central Bank.

It is projected to grow by 3.9 per cent in 2023 and 4.3 per cent in 2024, according to the regulator.

Despite tighter global financial conditions the UAE's non-hydrocarbon real growth will remain strong at 4.8 per cent this year, the Institute of International Finance said in a report last month.

That is above the 4.2 per cent estimate of the UAE Central Bank for this year and its 4.6 per cent forecast for 2024.

Meanwhile, the headline PMI index reading of Egypt, the Arab world's third-largest economy, showed that the deterioration of business conditions in its non-oil private sector economy had softened in April as cost inflation dropped to a one-year low.

The S&P Global Egypt purchasing managers’ index reading hit 47.3 in April, up from 46.7 in March, its highest reading since October last year, with new orders falling at their softest pace for four months.

“The latest PMI figures for Egypt provided some promising hints for the direction of the non-oil economy, particularly on inflation,” Mr Owen said.

“Relative calmness in currency markets led to reduced pressure on import prices, culminating in the softest rise in purchase costs for a year and one that was weaker than the trend rate. The slowdown encouraged firms to raise their own charges to a lesser extent, which helped to partly alleviate the downturn in sales.”

The survey's findings suggest that headline inflation in Egypt should begin to soften over the coming months after hitting a near six-year high of 32.7 per cent in March, which is expected to ease the country's cost-of-living crisis.