UAE boost from regional unrest slows down

UAE business activity slips for a second month in a row, signalling the positive economic impact from regional unrest may be fading.

UAE business activity dropped for a second consecutive month in the latest sign that the positive effects from unrest in the Middle East may be waning.

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The rate of increase in output levels rose at its slowest pace last month since September, according to HSBC's purchasing managers' index (PMI).

"The headline number has softened for a second consecutive month, suggesting that the lift the UAE received from unrest elsewhere may be fading," said Simon Williams, the chief economist for the Middle East and North Africa at HSBC.

The dip follows similar falls in money supply and banking deposits in May, the latest Central Bank data shows. The amount of money in circulation declined by 1.1 per cent, the first monthly drop since November. Deposits slipped by 0.4 per cent to Dh1.123 trillion (US$306 billion), the first monthly drop since December.

The economy received a boost this year as the UAE's banking and tourism industries benefited from instability in Egypt, Tunisia, Bahrain and elsewhere.

Money supply and deposits rose strongly in February and March as hotels and restaurants welcomed rising numbers of tourists.

The PMI, which assesses non-oil private-sector activity, reached a peak of 57.5 points in April. But it then fell from 56 points in May to 55.2 points last month, its lowest reading for three months.

In a further sign of cooling business activity, hiring rose at its slowest pace for seven months.

New business orders remained broadly unchanged last month, remaining close to April's peak. Improved market conditions and product launches were cited by PMI respondents as reasons for higher demand.

Purchase price inflation remained high, despite easing to its weakest pace for three months. One fifth of respondents said average input costs climbed compared with May. Stronger demand for raw materials and disruptions to supply caused by the Japanese earthquake and tsunami in March were cited as reasons.

Despite high input costs, the number of firms passing on higher costs to consumers fell.

Inflation in the UAE rose to a three-month high of 1.4 per cent on an annual basis in May, but many economists expect inflationary pressures to remain muted this year.

"There's enough in the data to persuade me that the underlying recovery is still under way," Mr Williams said. "Output was up in June, if less markedly than in May. The new order book still looks strong and employment is still gaining."