Business activity in largest Arab economies improves in January

Saudi Arabia and the UAE both reported their highest Purchasing Managers' Index readings since the second half of 2019

Dubai's skyline. Chris Whiteoak / The National

Business activity in the non-oil private sector of the Arab world's two largest economies improved in January, as growth in output and new orders supported a continued recovery from the Covid-19 driven slowdown.

Growth in Saudi Arabia's non-oil private sector was driven by strong business activity amid rising new work levels and a faster upturn in export sales.

The IHS Markit Saudi Arabia Purchasing Managers' Index posted 57.1 in January, up fractionally from 57 in December, to record its highest reading since November 2019. A reading above a neutral 50 level indicates economic expansion and below points to a contraction.

The headline index was lifted by the fastest output level expansion in the Arab world's largest economy in 15 months. The rate of output growth was broadly consistent with the trend seen over the survey's 11-year history, as the economy recovered further from the Covid-19 outbreak.

"The country has been helped by low [Covid-19] case numbers, while other parts of the world have suffered a spike in infections that risks derailing the upturn in the global economy," David Owen, an economist at IHS Markit, said. "The non-oil sector has also escaped the trends of weakening supply chains and rising cost inflation recorded elsewhere around the world."

Employment edged into positive territory for the first time in over a year, showing that firms are gaining more confidence to expand their operating capacity

The expansion in business activity was also helped by a sharp rise in new orders in January, although the pace of growth eased slightly from December's recent high. Improving market conditions, rising online sales and greater export demand all supported the upturn.

"Notably, new orders from foreign clients rose to the greatest degree in almost four years," according to the survey.

Despite strong growth in both output and new work, staff hiring in Saudi Arabia's non-oil economy remained subdued.

"While client demand has soared in recent months, this has not fed through into rising employment numbers,” Mr Owen said, adding that firms have indicated that excess staff capacity was sufficient to deal with rising incoming work.

The UAE's headline seasonally adjusted IHS Markit Purchasing Managers' Index remained at 51.2 for a second month running, its highest reading since August 2019.

Businesses in the Arab world's second largest economy reported a solid expansion in activity during the first month of 2021, on the back of an increase in client sales and a resumption of construction projects. The rate of output growth eased slightly from December’s five-month high, but remained one of the quickest seen since the outbreak of Covid-19.

"Compared to the results seen throughout 2020, the latest data indicated more favourable business conditions," Mr Owen said.

The amount of new business also increased in the latest survey period, in part due to higher export sales, driven by rising orders from the Gulf region.

UAE Businesses reported a "slight uplift in employment" in January, according to the survey. "Employment edged into positive territory for the first time in over a year, showing that firms are gaining more confidence to expand their operating capacity," Mr Owen said.

Higher business activity also encouraged an expansion in purchasing, boosting inventories. Input costs fell at the quickest rate since last April, linked to a reduction in staff costs and a softer rate of purchase price inflation.

Both Saudi Arabia and the UAE have opened up their economies and eased restrictions on businesses. They have also rolled out mass inoculation programme to curb the pandemic.

However, despite positive developments on the vaccine front, the world is grappling with second and third waves of Covid-19 infections coupled with emerging variants of the virus that resulted in fresh lockdown in parts of Europe, Asia and North America.

Covid-19 infections globally have crossed 104 million, with 2.26 million fatalities as of Wednesday, according to Worldometer data.

"The rapid roll-out of Covid-19 vaccines in the UAE should help to restore confidence in markets over the first half of 2021," Mr Owen said.

Meanwhile in Egypt, the Arab world's third-largest economy, business conditions remained subdued in January, reflecting extended falls in output and new business.

The IHS Markit Egypt Purchasing Managers' Index rose slightly to 48.7 in January from 48.2 in December, below the 50 no-change mark for the second successive month.

However, the pace of deterioration softened from December. The fall in employment was also the weakest in 15 months, as expectations for future economic activity improved to the highest since July 2020.