UAE’s non-oil sector saw slight improvement in May, but softening demand is still weighing on firms

Operating conditions in the UAE’s non-oil private sector saw a modest recovery in May, though the improvement masked deepening strains from regional geopolitical tensions and the worst supply-chain disruption since the pandemic.

The S&P Global UAE Purchasing Managers’ Index (pdf) rose to 52.6 in May, up from 52.1 in April, remaining comfortably in expansion territory but still running well below its long-run average of 54.3. That’s mostly due to a slight improvement in operating conditions and output growth despite ongoing supply chain disruptions, which weighed on export orders and input delivery times.

MENA economist Hamzeh Al Gaaod thinks the recovery can be attributed to the “positive sentiment on [the US and Iran] reaching an [agreement],” along with the persisting ceasefire.

The persistent issue for non-oil firms is the “cascading effect” of the maritime trade disruptions through the economy and the uncertainty over how long the conflict will last — both of which are suppressing export demand. “The UAE’s non-oil sector has been significantly impacted by the regional tensions and the consequent supply disruptions,” CIO at Century Financial Vijay Valecha tells EnterpriseAM.

Yes, but — could the impact have peaked? “The pace of decline of [export orders] eased notably from April, signaling the worst may be behind us,” he adds.

One thing that might take some time to resolve is the issue of reconciling increased costs with softening demand. “Businesses often mentioned that the soft demand environment had made firms more price competitive than usual, resulting in higher fuel and material prices being absorbed by companies rather than passed on to customers,” David Owen, principal economist at S&P Global Market Intelligence, said. That’s weighing on employment trends, with hiring slowing to its mildest pace since October.

The good news: The costs firms are absorbing are being offset by multiple government programs aimed at providing support to the economy, Al Gaaod says. The government and freezones alike are offering support packages and stimulus to help firms struggling with disruptions and increased costs, with Dubai so far introducing a total of AED 2.5 bn for sectors like tourism, trade, education, customs, transport, and aviation.

The one clear bright spot is sentiment: Business expectations for the year ahead remained strong in May, with firms treating current disruptions as temporary and anticipating a swift growth rebound once conditions normalize.

That optimism is well-placed, Valecha says. “When the conflict eases, pent-up export demand and a recovering tourism sector position the UAE for a sharp PMI re-acceleration toward and beyond its long-run average,” he adds.

Dubai mirrored the national trend, with its PMI edging up to 52.0 from 51.6 in April — but activity growth there slowed for a fifth consecutive month, reaching its weakest level since June 2021.