The UAE’s non-oil sector slowed slightly in January from a month earlier, yet remained robust even as the introduction of VAT affected costs, according to a key gauge of the sector.
Emirates NBD’s UAE Purchasing Managers Index fell to 56.8 in January from 57.7 in December, the lender said on Monday. A reading above 50 suggests the non-oil economy is growing, while a reading below 50 suggests a contraction. The survey is sponsored by Emirates NBD and produced by IHS Markit, a financial information services company.
“The January survey indicates that non-oil sector growth got off to a strong start in 2018, notwithstanding the slight decline in the headline index,” said Khatija Haque, head of Mena research at Emirates NBD. “The impact of VAT is evident in the sharp rise in input costs last month. While selling prices also increased in January, the survey suggests that the full rise in input costs was not passed on to consumers.”
_______________
Read more:
UAE, Saudi Arabia's non-oil economies end 2017 on a high note
Dubai's non-oil economy index dips in December
_______________
The UAE introduced VAT on January 1 at a rate of 5 per cent to help boost government income crimped by oil prices that have slumped from the mid-2014 high of $115 a barrel before recovering to the current level of around $70 a barrel following an agreement on production cuts between Opec and non-Opec members.
Government officials have said the newly introduced VAT will increase consumer prices by 1.4 per cent this year.
VAT affected pricing and purchasing in January, with purchase costs rising at the fastest pace since November 2011, while wages and salaries also picked up pace, Emirates NBD said.
Meanwhile, the non-oil private sector in Saudi Arabia had subdued growth in January, with fewer new orders linked to the introduction of VAT in the kingdom, the lender said.
However, hiring picked up to its strongest level since August 2016 and business optimism reached an eight-month high.
“The softness in the January PMI survey was fairly broad-based, with faster employment growth being the main highlight,” said Ms Haque.
“Wage increases, fuel subsidy cuts and the introduction of VAT is evident in the higher input costs and staff costs components of the survey in January. However, firms were the most optimistic about their prospects in the coming 12 months than they have been since May 2017.”
Saudi Arabia PMI declined to 53 in January from 57.3 in December, as business conditions for the non-oil private sector recorded the slowest improvement since August 2009 when the index was first published.
Survey respondents cited intense competition for new work and temporarily softer order demand following the introduction of five per cent VAT in January. Accelerating cost pressures were linked to fuel subsidy cuts and VAT, the bank said.
Saudi Arabia is enacting a far-reaching package of reforms to diversify its economy in the face of lower oil prices and heightened global competition. The kingdom has introduced VAT and increased energy prices as part of reforms aimed at increasing revenue and narrowing the fiscal deficit caused by low oil prices.
The rate of job creation was the fastest for almost a year-and-a-half, with several firms noting that business conditions were expected to improve over the course of this year, said the survey. Business optimism was at its highest level since May 2017.