Non-oil sector takes another hit in April amid soaring prices, supply chain disruptions

The non-oil private sector had its weakest month in more than five years in April, amid increased cost pressures and ongoing supply chain disruptions due to the regional war, according to S&P Global’s latest Purchasing Managers’ Index (PMI) report (pdf). The country’s seasonally adjusted PMI slipped to 52.1, down from 52.9 in March, marking the softest expansion since February 2021.

A slump in demand as tourism fell during the month, coupled with shipping route disruptions, led to a decline in output and export orders, according to the report.

The drop was largely expected, and the fact that it didn’t fall by a wider margin is a sign that some recovery measures have helped. “The smaller drop reflects the fact that the UAE’s use of central bank measures, including the extension of credit to indebted businesses and individuals, is helping sustain the momentum,” MENA economist Hamzeh Al Gaood tells EnterpriseAM.

REMEMBER- The 50.0 mark is what separates expansion from contraction, so anything below 50.0 signals contraction. The last time the UAE’s non-oil sector was in contraction territory was in 2020, at the peak of Covid-19.

Costs bite: Oil and transport costs rose sharply, leading some businesses to reduce staff and freeze (or cut) salaries, with salary inflation falling to a 33-month low and workforce numbers across the non-oil sector falling to their lowest levels so far this year.

“Firms are looking to limit the impact where possible, with slowdowns in purchasing and hiring growth and even some reports of wage cuts, but a broad increase in price pressures is nevertheless still likely to dampen customer spending across the economy more widely,” Senior Economist at S&P Global Market Intelligence David Owen said.

As expected, consumers are starting to feel it: Businesses are starting to pass some of the cost pressures on to consumers, with average selling prices rising at a historically sharp pace.

We’ve been expecting this: As we recently noted, surging fuel, shipping, and ins. expenses have been weighing on businesses. While many firms initially attempted to insulate customers by absorbing these overheads, they are now beginning to pass those costs on to the broader economy. The hardest-hit sectors, analysts tell us, are tourism and hospitality, construction, transport and logistics, and retail and food.

At least more people are hopeful now: Perhaps as the ceasefire settles (attacks on Monday notwithstanding…) and with consumer demand still proving resilient, firms were upbeat about the coming year, with expectations rising to a three-month high.

Looking ahead: “As inflation increases because of how long the strait has been closed for, we’re likely to see more of an impact on PMIs, especially from an output and inventory movement perspective,” Al Gaood says.

Could we see contraction ahead? “It would be reasonable to expect a contraction in the non-oil sector that is on par with the early months of Covid and possibly worse, because Covid did not impact the manufacturing sector or seabound trade in the same way,” director of Khalij Economics and GCC analyst at GlobalSource Partners tells EnterpriseAM. Still, the slowdown in April was “remarkably mild” all things considered, he adds.

Over in Dubai

It was a similar story in Dubai, with conditions softening to their weakest since September 2021, and the PMI falling to 51.6, down from 53.2 a month earlier. Despite output and business growth softening on supply chain disruptions, businesses were again optimistic about demand recovery in the year ahead.

Elsewhere in the region

• Saudi Arabia’s PMI (pdf) rose to 51.5 in April, up from March’s contraction of 48.8, supported by new business growing as local clients returned to the market after a jittery March;
• Qatar also had a better April, although its non-oil private sector remained in contraction territory at 46.4 — jumping from 38.7 in March, which was its lowest level in nearly six years;
• Egypt sustained its fifth consecutive monthly drop to 46.6 in April, down from 48.0 in March.