Red Sea attacks dent Mena business activity

Reuters/Mohamed Abd El Ghany

• Purchasing costs rising
• Slowdown in pace of growth
• Business expectations hit lows

The attacks on shipping in the Red Sea are depressing economies across the Middle East and North Africa, as supply chain disruption takes its toll on business activity.

The latest economic monthly bulletins for the UAE, Saudi Arabia and Egypt all show a drop in operating activity for January.

Houthi rebels in Yemen have been targeting commercial vessels travelling through the Red Sea for more than two months in what they claim is a show of support for Palestinians in the Israel-Hamas war.

• Red Sea crisis ‘will push up Middle East consumer prices’

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Operators are, instead, choosing to reroute around the Cape of Good Hope, adding thousands of miles and considerable time and expense to the journey.

David Owen, a senior economist at S&P Global Market Intelligence, said the attacks have had a “modest” impact on the UAE’s non-oil sector, with a few companies noting delivery delays, aggregate backlogs rising and reports of higher shipping costs by survey respondents.

Business in the UAE’s non-oil sector dropped to a five-month low in January, with a slowdown in the pace of growth in new orders and employment.

The seasonally adjusted S&P global UAE purchasing managers’ index (PMI) fell from 57.4 in December to 56.6 last month. Although it was above the 50.0 mark, which separates growth from contraction, the number was the lowest in five months.

The headline Riyadh Bank Saudi Arabia PMI, 55.4 in January, down from 57.5 in December, was at its lowest level in two years, signalling a solid but weaker improvement in the health of the non-oil private sector economy.

Purchasing costs increased at the fastest pace since May 2012, according to the survey results, with businesses citing higher shipping costs as a result of the Red Sea attacks, as well as increased material costs and more supply chain risk.

Naif Al-Ghaith, chief economist at Riyad Bank said: “It’s clear that the non-oil economy has continued to grow, despite challenges stemming from rising costs and interest rates.”

Around 30 percent of the world’s container vessel traffic passes through the Red Sea, and an estimated 90 percent of those ships are now re-routing to avoid security risks in the Bab Al Mandeb strait between Yemen and Djibouti, the consultancy company BMI said.

Egypt’s PMI report from S&P was below the 50.0 neutral mark at 48.1 in January, down from 48.5 in December, signalling a modest deterioration in the health of the sector.

Business expectations worsened and were among the lowest observed in the survey’s history.

Owen said: “Some firms signalled that the Israel-Gaza conflict and associated geopolitical tensions had a negative impact on tourism activity, which could lead to further headwinds for the non-oil economy over the next few months. 

“Reflecting this, firms were also less upbeat about future activity and kept employment numbers largely unchanged.”

In Qatar, however, the PMI figure from the Qatar Financial Centre (QFC) rose to 50.4 in January, from 49.8 in December, buoyed by the country’s role as host of the AFC Asian Cup tournament.

Volumes of output, new business and backlogs of work were all higher compared with December, while employment growth was maintained, and the 12-month business outlook strengthened.

Yousuf Mohamed Al-Jaida, CEO of the  QFC, said: “There were renewed expansions in output and new orders in January, following brief pauses at the end of 2023. Moreover, demand was strong enough to generate an increase in outstanding business, only the second occurrence of rising backlogs over the past year and a half.”