UAE businesses fear recession, despite positive economic data

Reuters

• Many fear affects of global downturn by end of year
• Cost of living crisis puts SMEs in firing line
• Other business owners optimistic they will ride storm

The United Arab Emirates’ non-oil private sector saw business activity reach a 38-month high in August.

S&P Global’s monthly UAE Purchasing Managers’ Index (PMI) identified strengthening demand, a drop in costs, which was mainly due to the decline in fuel prices, a sharp uplift in new orders, rising job creation and even faster repayments for suppliers.

With all these positive local economic indicators, future sentiment should also be at a record high. But this is not the case.

• GCC markets offer opportunities in face of global recession

“Despite positive signs for output and new orders, firms are showing greater hesitancy about the longevity of this strong growth phase,” David Owen, economist at S&P Global Market Intelligence, said.

“Business confidence for the coming year was down to a 17-month low in August, amid warning signs that the global economy could enter a recession towards the end of the year.”

The UAE’s monthly PMI rose to 56.7 in August, from 55.4 in July, rising to a 38-month high and well above the series average since 2009 of 54.2.

“Input costs notably fell for the first time since January 2021, as lower fuel prices helped to ease the burden on companies’ expenses and encouraged price drops for other items,” Owen said.

“The renewed decrease marked a considerable turnaround in inflationary pressures, which had reached an 11-year high in June.

“The data offers hope for other countries struggling with persistent inflation, although concerns remain that global energy supply constraints will continue to push prices higher.”

Naim Maadad, chief executive and founder of Gates Hospitality and a board member of UAE Restaurant Group, said concerns about the future were genuine among business owners in the UAE, despite the positive economic indicators.

“Inflation and cost of living will cripple a lot of SMEs [small and medium-sized enterprises],” he told AGBI.

“While the top line of the business stays healthy, flow through and conversions are diminishing due to prohibitive costs.”

Maadad previously predicted that between 10 to 15 percent of businesses in the hospitality sector would not survive due to the increased cost of living. 

“Sadly, I have yet to see anything that makes me change my mind,” he said.

“Although falling energy prices have provided some relief recently, the cost of electricity, gas and oil is still considerably higher than it was this time last year.”

Thierry Leleu, CEO of Equitativa, the manager of Emirates REIT, a Dubai-based real estate investment trust, agreed that businesses were anxious about the global outlook, despite strong local economic indicators.

“I think they’re very nervous also because we are still in a very global world,” Leleu said.

“Over the past two years since Covid what we’re seeing with the energy crisis in Europe etc, deglobalisation is probably something that people are working on quite hard but that will have inflationary pressures.

“I think the UAE has a very good positioning, because it is pretty immune from the energy crisis – it’s not in a fight with the Russians.

“It suffers, like everybody, from disruption in supply chains but it’s a better place to live in than Europe.”

Strong dollar

James Westerby-Jones, partner and group CFO at TACCT Group, a Dubai-based food and beverage business development firm, said his company had not yet felt the full impact of global inflation, supply chain challenges or interest rate hikes on it’s UAE or Gulf customers.

“The US dollar strengthening against our supplier currencies has increased our customer’s buying power across the food and beverage industry in USD pegged markets, such as UAE and KSA,” Westerby-Jones said.

“Food distributors and retailers are still holding stock purchased at pre-inflation prices, which they are potentially now paying for at a reduced cost due to their credit terms and USD strength, so keeping prices down to the consumer”

Westerby-Jones echoed Leleu’s point that global concerns are pushing businesses and consumers to look local.

“We are seeing food retailers increasingly looking for local produce,” he said.

“Both the UAE and KSA continue to invest heavily in locally produced goods, from fruit and vegetables grown on vertical farms to some of our clients’ locally produced vegan chocolate and snacks.”

Westerby-Jones predicted that the stronger dollar and inflationary pressures may be the catalyst for the development of local markets and that the UAE’s net zero goal may “become a surprise benefactor of the US dollar’s rise”.

Jonathon Davidson, founder of Davidson and Co Law Firm and a board member of the British Business Group Dubai and Northern Emirates, also speculated that some of the nervous sentiment among the UAE business community may be down to watching too many negative headlines from overseas.

“Many business owners in the UAE are expatriates so they naturally keep a watchful eye on their home economies and are inherently affected by sentiment back home,” Davidson said.

“However, there are key indicators which might serve to shield the UAE from the brunt of any economic headwinds. These include high oil prices, increased economic immigration, GDP growth and solid banking liquidity. 

“The mood in the UAE remains one of cautious optimism.

“Business owners remain acutely aware that a global economic slowdown is likely, but they are also optimistic that the UAE’s key strengths, and the continuation of fast moving economic and legislative reforms, will allow the community to ride the storm.” 

Jen Blandos, founder of Female Fusion, a UAE-based community of female entrepreneurs, said that her members are feeling very positive about the future.

“When I speak with our members, I hear that orders are up and they are the busiest that they have been in a few years,” she said.

“Our members have also benefitted from partnerships we’ve created with other businesses to bring down practical costs for them, such as reduced shipping rates with Aramex and lower payment gateway fees with Stripe, which represents big cost savings.

“Many businesses in Female Fusion are also micro-businesses, which means that they typically have less than ten employees, and are often selling products or services that are in demand locally, and they can also quickly react to market demands in a way that larger businesses might not be able to.”

James Swanston, Middle East and North Africa economist at London-based Capital Economics, sounded an upbeat tone for the UAE and wider Gulf economies.

“Overall, the PMIs suggest that non-oil activity in the Gulf economies, particularly Saudi Arabia and the UAE, has been strong in Q3 and that there is a marked divergence with the rest of the region,” Swanston said.

“With the first signs of fiscal policy being loosened in the Gulf and credit growth strengthening too, this trend is likely to persist.”