Arab world's three largest economies improve as pandemic restrictions ease

The Purchasing Managers' Indexes of Saudi Arabia, the UAE and Egypt showed an improvement as business activity picks up with the rollback of lockdown measures

The Kingdom Tower, operated by Kingdom Holding Co., left, stands alongside the King Fahd highway, illuminated by the light trails of passing traffic, in Riyadh, Saudi Arabia, on Saturday, Jan. 9, 2016. Saudi Arabian stocks led Gulf Arab markets lower after oil extended its slump from the lowest close since 2004. Photographer: Waseem Obaidi/Bloomberg
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The non-oil private sector in Saudi Arabia, the UAE and Egypt, the Arab world's three largest economies, improved in May as restrictions imposed amid the Covid-19 pandemic began to ease.

The seasonally-adjusted IHS Markit Saudi Arabia Purchasing Managers' Index – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – improved to 48.1 in May from 44.4 in April.  Slower declines in output, new work and employment helped improve the contraction. A reading above a neutral 50 level indicates economic expansion and below points to a contraction.

The overall decline in output volumes was slower than the survey-record seen in April. However, businesses continued to report an impact on customer demand from the Covid-19 pandemic, according to the survey.

Non-oil private sector output has now decreased for three consecutive months, according to the latest survey data. The latest drop was “overwhelmingly attributed” to business closures and constrained capacity amid the public health emergency. Some firms, however, said that an easing of lockdown measures had helped alleviate pressure on private sector businesses.

“Business conditions in Saudi Arabia deteriorated again during May, but the speed of the downturn moderated from April's survey-record pace,” Tim Moore, economics director at IHS Markit, which compiles the survey, said.

“Some firms noted that an easing of lockdown measures had helped mitigate the downturn in May, alongside efforts to boost online business operations,” he said.

May data also shows businesses have increasingly sought to agree salary cuts in the face of reduced workloads, with the latest drop in average staff costs the fastest since the survey began in August 2009, he added.

The latest data collected in Saudi Arabia between 12-21 May also shows a decline in new order volumes across the private sector economy due to worsening global economic conditions and spending cutbacks. Export sales also decreased, largely because of international border closures and a lack of shipping availability.

Purchasing managers' indexes and production gauges in most developed and emerging economies have declined as government imposed lockdowns to stem the spread of Covid-19. The pandemic is the greatest challenge for the world economy, which is set to slide into the deepest recession since the 1930s. Economies are gradually opening four months after the World Health Organisation declared Covid-19 a pandemic.

Saudi Arabia and the UAE are now opening up, as restrictions on peoples’ movements are eased. Public and private sector employees are returning to work in phases, while malls and other private sector businesses have reopened. On Tuesday, Dubai said all malls and private sector business will operate at 100 per cent capacity.

The UAE's headline seasonally adjusted IHS Markit PMI increased to 46.7 in May from a record low of 44.1 in April.

Output fell to a much lesser extent than April's unprecedented drop. Though private sector firms were still constrained by weaker market environment and lower employment, greater freedom of movement in the country led to an easing of supply chain pressures, while input costs ticked up for the first time since February, according to the survey.

“The change in curfew hours in May helped to lighten the impact on the UAE economy,” David Owen, an economist at IHS Markit, said.

"Some firms noted that an easing of lockdown measures had helped mitigate the downturn in May, alongside efforts to boost online business operations," Tim Moore, economics director at IHS Markit, said.

Lockdown measures worldwide have notably reduced exports, and limited input supply. Export sales in the UAE fell in May, but at a softer rate, while the lifting of travel restrictions helped deliveries, he added.

UAE firms continued to reduce employment numbers in May, although the latest fall was the softest since February. Rising cost pressures led them to make further adjustments to salaries, as staffing costs fell at the quickest pace in the survey's history.

Meanwhile, Egypt's non-oil private sector has also rebounded from a record low in April, with the headline IHS Markit Egypt Purchasing Managers’ Index rising to 40.7 in May from 29.7 in April.

Output levels in the Arab world's third largest economy continued to contract midway through the second quarter, although the rate of decline eased considerably from April when businesses were mainly shut.

“Solace for Egyptian firms is that overall cost burdens eased for the first time in the series history, as wage cuts coupled with only a marginal rise in purchase prices in May,” Mr Owen said.  “This could be important as firms look to maintain low output prices for when the economy recovers, with the market environment likely to be challenging.”