Saudi Arabia's non-oil private sector reported strong growth in business activity in June, hitting the highest level in four months driven by domestic demand, despite a slump in export sales.
The seasonally adjusted Riyad Bank Saudi Arabia purchasing managers' index (PMI) rose to 53.3 in June, up from 52.8 in May. A reading above 50 indicates growth in overall business conditions.
Output increased sharply amid an improvement in new business growth, supported by recovering domestic demand, the report said. But the sector faced continuing challenges in export markets and heightened inflationary pressures.
About 18 per cent of surveyed firms reported higher output on the back of project approvals, stronger customer demand, and renewed sales activity following earlier postponements.
Companies reported a rebound in investor confidence and domestic customer spending as broader sentiment towards the regional conflict improved.
But the “uplift in overall sales stood in contrast to export performance, as new orders from foreign customers contracted steeply for the fourth month running”, the report said.
Survey respondents cited continuing regional logistics challenges and intensified foreign competition as the main reasons for the drop in international sales.
The Iran war, which began on February 28 and led to a blockade of the Strait of Hormuz, tipped the Middle East into one of its worst geopolitical crises in decades.
The US and Iran agreed to a two-month ceasefire in June and are in negotiations to reach a permanent peace deal. The initial agreement has also led to the strait being reopened to shipping, which is expected to relieve economic pressure on Gulf economies.
Despite four months of disruption, economies in the Gulf have maintained growth momentum, albeit at a slower rate, the International Monetary Fund said in June.
The fund expects the kingdom's economy to grow at 2 per cent this year, down from its earlier projection of 3.1 per cent. “Non-oil activity would be supported by domestic demand, underpinned by stable public employment, government spending, and the steady execution of private and public capital projects,” the fund said last month, following a mission to the country.
Average inflation is projected to increase to about 2.3 per cent as higher shipping and insurance costs add upwards pressure on prices, it said.
The latest PMI found that price pressures remained steep in June, completing the most pronounced quarter of cost inflation in 15 years.
Purchase price inflation quickened slightly from May, as elevated fuel costs, freight charges, and supplier price increases linked to the Middle East conflict persisted.
Employment was also flat during June, which partly reflected heightened concerns about business expenses. Staff costs increased as firms implemented pay revisions, the report said.
In response, businesses raised prices at the second-quickest pace in nearly six years.
“The pricing environment remained the principal challenge during June,” said Naif Al Ghaith, chief economist at Riyad Bank.
“Higher purchase prices and rising staff costs continued to place upwards pressure on operating expenses, leading firms to increase selling prices further. While cost pressures remain elevated, businesses appear to be managing them without materially affecting activity or confidence.”
Supply chain conditions showed signs of recovery last month, with delivery times improving at the fastest rate since February as firms adopted local sourcing strategies and alternative supply routes.
Business sentiment at non-oil firms improved “markedly”, with expectations centred on anticipated improvements in market conditions and hopes that regional peace agreements would resolve supply chain disruptions.
“Business sentiment continued to strengthen, with firms reporting their highest level of optimism since January,” Mr Al Ghaith said.
“This positive outlook reinforces expectations that non-oil growth will remain supported during the second half of the year.”
