Business confidence in largest Arab economies improves in May on robust growth momentum

Selling prices in Saudi Arabia rose at their quickest pace since August 2020 while optimism in the UAE rose further amid strengthening demand

The skyline of Riyadh. Saudi Arabia's headline purchasing managers' index reading stood at 58.5 in May. AFP

Business confidence in Saudi Arabia and the UAE continued to outpace the long-standing average readings of the Arab world's two largest economies amid robust growth.

The headline Riyad Bank Saudi Arabia Purchasing Managers' Index reading stood at 58.5, slightly lower than the 59.6 registered in April, but well above the neutral 50-mark that separates economic expansion from contraction and its long-running average of 56.9.

Selling prices in the kingdom rose at their quickest pace since August 2020, depicting the robust economic momentum in the country.

The seasonally adjusted S&P Global UAE Purchasing Managers' Index reading came in at 55.5 in May, softer than the 56.6 level in April. It was well above the economy's long-running average of 54.2, as business confidence hit its strongest level since October 2021.

Saudi Arabia's new order inflows continued to rise considerably in May, after growth quickened to its highest in slightly more than eight and a half years in April.

Businesses surveyed linked rising new orders to improved economic conditions, as well as a pickup in travel and tourism activity and increased government investments.

“The kingdom’s non-oil gross domestic product is likely to have notably grown in the second quarter this year, thanks to the healthy state of the private sector,” said Naif Al-Ghaith, chief economist at Riyad Bank.

The headline PMI reading highlights the “ongoing resilience of the domestic business sector to a number of headwinds, including the tightest monetary conditions since at least 2007”, he said.

Saudi Arabia's economy expanded by 3.9 per cent in the first quarter on an annual basis, boosted by growth in its non-oil sector as the kingdom continues to diversify its economy and reduce its reliance on hydrocarbons.

Non-oil activities grew 5.8 per cent in the first three months of the year, compared with the same quarter in 2022, while oil activities rose 1.3 per cent during the period, estimates released by the General Authority for Statistics in May showed.

The economies of oil-exporting countries in the Mena region are expected to remain resilient, supported by robust momentum in their non-oil economic growth, even if hydrocarbon revenue declines, the International Monetary Fund said last month.

The kingdom's economy expanded by 8.7 per cent last year, the highest annual growth rate among the world's 20 biggest economies, driven by higher oil prices and the strong performance of its non-oil private sector.

The hydrocarbon revenue windfall in 2022 helped the crude exporter to build fiscal buffers and invest in efforts to drive its non-oil economic growth.

Although slower growth in Saudi Arabia's oil economy and rising interest rates will create a challenging environment for some companies, “most Saudi firms are in good shape and experiencing robust business conditions”, Mr Al-Ghaith said.

The headline reading in May reinforces the view that “overall economic activity is holding up well as we enter the summer months”, he said.

Employment growth in the kingdom also remained strong in May, with the rate of job creation picking up to joint fastest since the beginning of 2018.

However, businesses said they had to increase staff expenses as salaries rose due to labour shortages and rising living costs. The rise in staff costs was the second quickest since September 2016.

In the UAE, the improvement in operating conditions was largely driven by a sharp uplift in sales volumes in May.

New business intakes rose at a pace that was only marginally slower than April's 17-month high, with businesses surveyed citing new clients and a rise in travel and tourism activity as prime reasons for growth.

The surge in new business underlined growing confidence in the UAE's economic prospects.

“In this positive environment, business optimism has continued to improve in the UAE, and it rose to the highest level since October 2021, with nearly a fifth of respondents expecting greater output in 12 months’ time,” said Daniel Richards, Mena economist at Emirates NBD.

In Egypt, the non-oil private sector economy experienced a softer decline in business conditions in May as progress towards a more stable demand environment led to a slower but still solid contraction in activity levels.

The country's headline S&P Global Egypt Purchasing Managers’ Index rose for the second successive month in May to 47.8, from 47.3 in April.

“The Egypt PMI remained in negative territory in May but showed further promise that current economic headwinds were beginning to dissipate,” said David Owen, senior economist at S&P Global Market Intelligence.