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Gulf’s non-oil sector challenged by growing pains 

Gulf non-oil growth challenges Reuters/Mohammed Salem
Shopping in Mecca: while May saw growth in the Gulf non-oil private sector, rising competition meant some firms felt challenges
  • Labour shortages are obstacle to delivering new orders on time
  • UAE business growth driven by domestic demand
  • Saudi new orders slowed slightly but job creation rose

The pace of growth in non-oil business activity is creating challenges for business owners across the Gulf, including delivering new orders on time, increased labour shortages and higher non-staff costs.

The seasonally adjusted S&P Global UAE Purchasing Managers’ Index (PMI) stood at 55.5 in May as surveyed firms continued to report a marked increase in both activity and new orders.

Incoming new business rose at a pace that was only marginally slower than April’s 17-month high of 56.6. Although marking a three-month low, the index remained above its long-run average of 54.2 and well above the 50.0 growth threshold indicating growth.

New business growth was solely driven by domestic demand, as May data continued to signal a flat trend for UAE export sales.

The order levels have extended the current sequence of backlog accumulation to almost two years.

Employment levels also grew at the second-fastest pace since July 2016.

Qatar’s total business activity also rose further in May with S&P’s PMI rising for the sixth time in seven months to 55.6, from 54.4 in April, indicating the strongest improvement in business conditions since July 2022.

New business increased at the fastest rate in 10 months with the PMI figure mainly boosted by the output and new orders components. New business in financial services was also a strong point in the latest findings.

Non-oil private sector employment rose to the greatest degree since July 2022, helping firms to further reduce their levels of outstanding business in May.

While staff costs increased only marginally, May data signalled that non-staff cost pressures also rose, with average purchase prices increasing at the fastest rate since June 2021.

Output in Qatar has risen every month for almost three consecutive years, except for a brief correction in January as activity and new work slowed following the conclusion of the 2022 Fifa World Cup.

Water, Waterfront, PeopleReuters/Ibraheem Al Omari
Output has risen consistently in Qatar, except in January as activity and new work slowed following the World Cup

Saudi Arabia’s non-oil private sector has also continued to see a strong improvement in overall operating conditions in May. New order inflows continued to rise after growth quickened to its highest in just over eight-and-a-half years in April. Output also rose.

However, the pace of growth softened for both indicators and, in the case of activity levels, was the weakest recorded in 2023 so far. This meant the seasonally adjusted Riyad Bank Saudi Arabia PMI slipped to 58.5 in May from 59.6 in April.

While growth in orders has slowed slightly, the rate of job creation in the kingdom rose at the joint-fastest rate since January 2018, which allowed firms to work through backlogs at a quicker pace during May.

Some Saudi survey respondents mentioned having to increase their salaries due to labour shortages and rising living costs, leading to a sustained uplift in staff expenses that was the second-quickest since September 2016.

Gulf non-oil growth challengesSaudi Press Agency
Saudi Arabia’s Vision 2030 programme aims to boost the non-oil private sector and create jobs

The rise in wages partly drove a sharp uptick in average input costs, leading a greater proportion of Saudi companies to raise their output prices which rose sharply in May.

The rate of output charge inflation was the sharpest recorded since August 2020, with services and manufacturing firms increasing their prices at the fastest rates.

Business expectations in Saudi Arabia remained positive in May but rising competition meant that firms were not as confident as in April, with sentiment dropping to the lowest in a year.

Naif Al-Ghaith, chief economist at Riyad Bank, said: “Business expectations for the next 12 months eased slightly but still indicate optimism regarding future output.

“The government continues to implement large scale diversification policies and accelerate the development of giga-projects, aiming to boost the private sector, the engine for job creation.”

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