Saudi Arabia, UAE business conditions improve even as costs rise

Business conditions in Saudi Arabia and the United Arab Emirates improved in June, even as cost pressures increased.

Accelerating demand helped the Arab world’s largest economies secure new business orders and maintain employment levels. A purchasing managers’ index for Saudi Arabia rose to 59.6 from 58.5 in May, according to Riyad Bank. A similar S&P Global survey for neighboring UAE climbed to 56.9 from 55.5.

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Both gauges are way above the 50-mark that separates growth from contraction. The countries are among the world’s biggest oil exporters and benefited from a surge in crude prices to more than $100 a barrel after Russia’s invasion of Ukraine. Saudi Arabia was the fastest-growing G20 economy in 2022.

Oil prices have since fallen as the global economy has slowed, which will probably lead to weaker growth for Saudi Arabia and the UAE this year.

For now, economic conditions remain strong. In Saudi Arabia, non-oil private-sector companies boosted their purchasing activity at the fastest rate on record, while employment growth was at the strongest level since 2015.

“This economic spike may contribute to increased inflationary pressures alongside reported increases in staff and construction material costs,” said Naif al-Ghaith, chief economist at Riyad Bank.

Inflation is lower in the Gulf compared to most other parts of the world including the US and Europe, with prices rising 2.8 percent year-on-year in Saudi Arabia in May.

Still, it’s accelerated since 2021 and both the Kingdom and the UAE set aside billions of dollars to support low-income citizens last year.

In Saudi Arabia, some firms expect to benefit from government-backed investments in the coming year with those in the construction sector “especially optimistic.”

Manufacturers performed well as sales accelerated both domestically in the Kingdom and abroad. Outlook confidence rose to the highest level since the beginning of the year.

UAE firms had to lower their charges despite rising demand and a slight increase in input costs.

“Some of this growth was predicated on the offer of discounts to customers,” said Andrew Harker, economics director at S&P Global Market Intelligence. That “may not be sustainable in the long-term” given that input costs are rising.

In the UAE, expensive raw materials led to rising purchase prices, while strong businesses performance was a reason for higher staff costs.

Optimism for the coming year’s outlook grew but sentiment was lower than May and the historical average in the emirates.

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