Non-oil business activity in Saudi Arabia and UAE grew in January

The upturn, although slower than December, was widespread across sectors in the Arab world's two largest economies

The Kingdom Tower in Riyadh. Saudi Arabia's headline PMI index in January remained well above the neutral 50 mark that separates growth from contraction. Bloomberg

Business activity in the non-oil private sector economies of Saudi Arabia and the UAE continued to expand in January, albeit at a slower pace, amid continued growth momentum in the Arab world’s two largest economies.

The seasonally adjusted Riyad Bank purchasing managers’ index ­– a crucial gauge of the kingdom’s non-oil economy – slipped to 55.4 in January, down from 57.5 in December.

Though the headline PMI was at the lowest level in two years, the upturn remained strong overall and widespread across the monitored sectors, as it remained well above the neutral 50 mark that separates growth from contraction.

New business intake drove activity, but the rate of sales growth eased as several businesses reported slowing momentum amid competitive pressures.

The rise in new business also fuelled input demand as purchasing activity and inventory holdings grew sharply in January, although the rate of buying growth was at an eight-month low.

Purchase prices for non-oil businesses in the kingdom rose at the sharpest rate since May 2012, driven by strong demand, higher material prices, greater supply chain risk and increased shipping costs amid the Red Sea crisis.

“It's clear, [however,] that the non-oil economy has continued to grow, despite challenges stemming from rising costs and interest rates. This resilience underscores the diversification efforts within the Saudi economy,” Naif Al-Ghaith, chief economist at Riyad Bank, said.

“Despite cost increases, output prices have remained low, signalling a high level of competitiveness in the market.”

This, however, suggests that businesses in the kingdom are absorbing some of the cost pressure rather than passing it on to consumers, a move aimed at maintaining market share, he added.

Saudi Arabia, the world's biggest oil exporter, is transforming its economy under its Vision 2030 diversification agenda as it aims to reduce its dependence on oil, broaden its non-oil economic base and support domestic industries and job growth.

The kingdom's economy is projected to grow 2.7 per cent this year and 5.5 per cent in 2025, after contracting by an estimated 1.1 per cent last year due to cuts in oil output, according to the latest International Monetary Fund estimates.

Non-oil economic growth, however, has remained robust on government initiatives as the kingdom opens up various sectors for foreign investment. The kingdom is developing several new projects spanning sectors including property, tourism, entertainment and infrastructure.

Riyadh also enacted a regulation this year requiring multinational businesses to set up a local base or face the risk of losing out on government contracts.

In the UAE, the PMI trend also reflected a sharp, but slower, expansion in non-oil output in January.

The headline S&P Global UAE Purchasing Managers' Index dropped to 56.6 in January from 57.4 in December.

The rate of growth was the slowest since August 2023, although it remained much stronger than the long-run average of the survey since 2009.

“While the UAE non-oil economy largely continued where it left off at the end of 2023, the PMI's dip … in January pointed to a slight moderation of growth from the sector's best quarterly performance in four-and-a-half years,” David Owen, senior economist at S&P Global Market Intelligence, said.

The rise in new business intakes was similarly marked in January, with about a quarter of respondents noting an increase from December.

Businesses surveyed continued to highlight strong demand conditions that helped drive new customers and higher sales.

“As was the case in December, the positive development was broadly domestic driven, as firms reported only a fractional increase in foreign new orders,” according to the survey.

However, companies reported only a slight rise in their staffing levels during January. The pace of growth was the slowest in just over a year.

The UAE's economy expanded 3.7 per cent annually in the first half of last year, driven by strong non-oil sector growth as the country continues to pursue its diversification goals, Minister of Economy Abdulla bin Touq said in October.

Last month, the UAE Central Bank increased its 2024 growth forecast for the country's economy to 5.7 per cent, from its earlier estimate of 4.3 per cent, due to an expected rise in oil production this year.

The banking regulator also raised the UAE's non-oil gross domestic product growth for 2024 to 4.7 per cent.

Businesses surveyed in the Emirates pointed to growing supply-chain risks that led to delivery delays, as well as increasing shipping costs in January.

“The disruption to supply lines resulting from the Red Sea attacks appeared to have a modest effect on the UAE non-oil sector in January, with a few firms noting delivery delays, aggregate backlogs rising, and reports of higher shipping costs by survey respondents,” Mr Owen said.

“The impact on inflationary pressures so far has been notable but not severe, as input costs rose at a faster rate than in December but remained slower than in the preceding three months.”

The demand downturn in Egypt quickened in January and inflationary pressures escalated as operating conditions in the country's non-oil economy further deteriorated.

The headline S&P Global Egypt Purchasing Managers’ Index dropped to 48.1 in January, down from 48.5 in December, as the selling price inflation rose at the fastest rate in a year and drove a weakening of order books and contractions in output and purchasing.