Rising raw material costs are threatening to smother a recovery in private sector growth, analysts say.
Input prices rose at their fastest pace ever last month on HSBC's purchasing managers's index (PMI), which surveys business activity in the non-oil sector.
The rise contributed to holding the expansion of business activity to its lowest level in three months, the HSBC survey released yesterday revealed.
"There is business growth but it's yet to really gain traction and establish itself," said Simon Williams, the chief economist for the MENA region at HSBC.
"Costs are rising and that's leading to pressures on business margins as firms are struggling to pass higher input costs into their own prices."
Firms in other markets across the world, including the US, China and the UK, are also facing big price increases that threaten to stunt profit growth this year.
During the boom years in the UAE, buoyant demand meant firms were able to pass cost rises on to consumers. This trend contributed to accelerated inflation.
Now, however, more sluggish consumer demand has given shoppers greater choice. Therefore, firms are limited in their ability to pass on higher costs.
Prices of commodities such as copper, aluminium, steel and cotton have shot up in recent months, with copper hitting a record US$9,728 a tonne yesterday.
"Our margins have been strained as costs are going up but the demand for building materials has not returned," said a senior manager of a construction materials supplier in Dubai, who declined to be named.
Respondents in the survey cited unfavourable fluctuations in exchange rates as another principal factor behind the inflation.
Staff wages remained largely stagnant last month, the survey showed, another indication of the pressure on businesses. The backlog of work fell last month for the 17th consecutive month.
Inventory levels also remain very low, suggesting confidence in the upturn remains fragile, HSBC said.
Overall, the headline PMI remained steady at 53 points last month, the same level as in November. A score above 50 points indicates private-sector growth.
More than 10 per cent of companies in the survey reported rises in production, with the same number also experiencing gains in new orders.
New export orders rose particularly strongly as the UAE benefited from strengthening growth elsewhere in the region and from greater demand for non-oil goods and services in emerging markets.
As in previous months, growth in the UAE's private sector was outpaced by Saudi Arabia, the region's biggest economy.
Saudi Arabia's PMI remained strong at 61 points last month, although down slightly from November.
Output was also more robust, with 35 per cent of firms reporting it had risen on a monthly basis. Almost 40 per cent of firms had new orders on their books.
"Saudi Arabia's data is really strong and there is a sense of the economy building momentum," Mr Williams said.
