UAE businesses keep squeeze on profits as inflation bites

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• UAE is outlier as most countries pass costs to consumer 
• Businesses will need to increase prices in months ahead
• F&B, hospitality and aviation will decide on prices after the summer 

Businesses in the UAE’s non-oil sector continue to defy global trends by choosing to squeeze profits rather than hike prices, as energy costs climb at the fastest pace for 11 years, according to a new survey.

However, industry sources have told AGBI that this situation is unlikely to be able to continue in the long-term and businesses will need to increase prices in the coming months.

The latest S&P Global UAE Purchasing Managers’ Index (PMI) found that rising energy costs and higher wage bills were biting into profit margins for UAE companies.

• Saudi and UAE boost spending to shield poor from inflation

“UAE businesses came under increased pressure from rising input costs in June, as a surge in fuel prices drove the fastest rate of cost inflation in exactly 11 years,” said David Owen, economist at S&P Global Market Intelligence.

“More than twice as many surveyed firms indicated a rise in their expenses compared to May, leading many to curb spending on inputs.

“Nevertheless, the latest data suggested that firms were unwilling to pass higher costs on to customers in June, as output charges were reduced at the fastest rate in over a year-and-a-half.” 

S&P Global carries out similar monthly surveys in over 40 markets and Owen said that the UAE bucked the global trend when it came to companies opting to squeeze their profits in the face of record costs.

“I don’t think it’s a standard step, it is something where the UAE is an outlier,” he said.

“In most of the countries we look at, businesses are able to pass at least some of that cost on to customers.

“It will be interesting to see whether that changes over the next few months. But in general, UAE businesses tend to hold off on price rises more than other places.”

Owen added that respondents to the UAE PMI said the threat of strong competition was the reason many had opted to offer price discounts to protect their sales.

This sentiment was echoed by Katy Holmes, general manager of the British Business Group Dubai and Northern Emirates.

“In order to retain clients and attract prospects, competitive pricing remains key in this region and businesses will also be reluctant to pass the rises on in their commercial terms. It’s a real rock and a hard place for business,” she said.

The PMI found that rising domestic and overseas demand saw a marked increase in business activity in the second quarter of this year, and companies have been increasing their recruitment levels in order to meet this demand.

However, Holmes said rising costs meant her members were not in a position to offer salary increases, despite the increased inflation pressures on employees.

“We have been following the cost of living and business costs closely on behalf of our membership,” she said.

“The financial burden of the pandemic is still raw so we’re sure that the majority of our members who are owner-managed businesses will struggle to provide wage increases so soon and while still in recovery mode. 

“There are some support strategies that businesses can provide employees to try and mitigate the increase to fuel and cost of living.

“These also support a more environmentally sustainable environment – encouraging public transport and carpooling and making allowances for working from home.”

S&P Global’s Owen said that “while firms remained positive about future activity, the survey data suggested that they are unlikely to maintain cost margins at the current levels.”

He added: “The ratio between the Input Price and Output Price Indices was the highest on record, signaling that price rises for customers are likely in the coming months.”

The PMI found that companies in the UAE are also among the most confident about prospects for the months ahead.

“With rising fuel prices and inflation showing the highest peak in 11 years, I am also concerned about the current economic situation,” Aftab Hasan, CEO of Arya Insurance Brokerage Company and secretary general of the Insurance Business Group, said.

“But Dubai has faced many crises and has emerged stronger than before with the new normal.”

Hasan added that the region has a “strategic” location in the Gulf and benefits from proximity to some of the fastest-growing economies in the world, including China and India. 

Naim Maadad, chief executive and founder of Gates Hospitality and a board member of UAE Restaurants Group, said: “Inflation will not spare anyone or anything and businesses need to be ready to adjust in order to survive. 

“I predict that most F&B and hospitality businesses will wait to see the summer season finish, after which we’ll see a bigger hike in Q4.

“From aviation, hotel stays and basic foods such as beef, chicken and vegetables increasing prices so drastically, it will affect us all. Brace yourselves, is all I can say.”