The non-oil private sector has contracted — for the first time in over 5.5 years. The headline Purchasing Managers’ Index (PMI) tumbled to 48.8 in March — a sharp drop from 56.1 in February, according to the Riyad Bank Saudi Arabia PMI (pdf). The 7.3-point drop is the second-largest decline in the survey’s history, eclipsed only by the initial pandemic shock of March 2020.

Geopolitical instability is doing most of the damage. Non-oil firms saw new business drop sharply as the regional war pushed clients to delay spending and shelve new projects pending clarity on the conflict, the report noted. Export orders were hit particularly hard, falling at their fastest rate in nearly six years.

Local logistics are also under strain. “There is a decline in new orders and local purchasing power, or at least in consumer confidence, which has led to a reduction in production and supply,” MENA Economist Hamzeh Al Gaaod tells EnterpriseAM. Transport costs have spiked as industries — particularly oil production — shift operations from the east to the west to secure exports, leading to “time delays and increased costs,” he said.

The backlog paradox: Though new business has slowed, work is piling up. Backlogs grew at their fastest pace since 2018 driven by freight delays and rising transport costs, while supplier delivery times hit their worst level since June 2020. This buildup suggests that “underlying demand remains present,” Riyad Bank Chief Economist Naif Al-Ghaith noted in the report, adding that “firms responded prudently by adjusting purchasing activity, while inventory levels stayed relatively well-positioned.”

There is a modest silver lining: Input cost inflation eased to its slowest pace in a year on softer wage pressures and weaker demand. Employment also continues to expand in March, albeit at a slower pace. Al Ghaith attributed this to firms continuing to hire “to meet local workforce targets” and manage supply pressures.

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