Non-oil growth slows in October as export orders fall and cost pressures climb

A margin squeeze and softening demand pulled Saudi’s non-oil headline lower in October, even as output growth picked up, the latest Riyad Bank PMI (pdf) shows. The headline index eased to 54.0 in October from 55.3 in September, which marks a seventh consecutive month of expansion and the second-highest level since February. Output accelerated; the headline cooled on slower growth in new orders, hiring and purchasing.

Thinner pricing power is eating into margins. Input cost inflation hit its highest level since June while firms’ ability to raise their own prices fell to a nine-month low, as competition forced discounting and left companies absorbing more of the increase.

Much of that pressure is coming from outside the Kingdom. Export orders fell for an eighth straight month, and faster than before, with almost a quarter of firms reporting lower foreign sales amid shipping disruption, higher freight and insurance costs, and stiffer competition. The same disruption is lifting input bills — purchase prices rose at the quickest pace in six months on freight, ins., raw material, and energy costs, and suppliers’ delivery times improved only marginally, the smallest improvement since April, with some firms turning to local inputs to get around slowed shipments.

Output itself picked up. Business activity accelerated over the month, which firms put down to improving demand and stronger sales and marketing. New orders kept rising, though growth softened from September and ran below trend, with domestic sales carrying order books. Underlying demand “remains positive but is becoming more selective,” Riyad Bank Chief Economist Naif Al Ghaith said.

Firms are still cautiously adding capacity: Non-oil firms added staff for a fourth month running, purchasing rose at close to the year’s fastest pace, and companies accumulated input stocks as a buffer against supply disruption, while backlogs rose for a second month. The renewed increase in outstanding business, purchasing and inventories suggests firms are “maintaining their readiness to accommodate future demand,” Al Ghaith said.

Confidence, though, stayed muted: Firms’ expectations for output over the coming year were mildly positive but eased relative to the series average, with geopolitical uncertainty weighing on sentiment.