Upturn in private sector loses steam in KSA in June

The improvement in the health of the Saudi Arabian non-oil private sector economy was sustained in June, but growth lost momentum. Both new orders and output increased at the weakest rates in eight months, while growth of buying levels softened to the weakest since data collection began. Concurrently, there was a renewed increase in new export orders. On the price front, cost inflation was slightly above May’s survey-record low. Subsequently, average selling prices rose.

The survey, sponsored by Emirates NBD and produced by IHS Markit, contains original data collected from a monthly survey of business conditions in the Saudi private sector.

Commenting on the Saudi Arabia PMI survey, Khatija Haque, Head of MENA Research at Emirates NBD, said: “The average PMI for H1 2017 stood at 56.0, well above the neutral 50.0 level and signalling a faster rate of non-oil private sector growth than in H1 2016.  However, faster non-oil GDP growth this year will likely be offset by contraction in the oil sector this year, following OPEC’s decision to extend output cuts through Q1 2018.”

Improvement in business conditions

The headline seasonally adjusted Emirates NBD Saudi Arabia Purchasing Managers’ Index (PMI) – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – fell from 55.3 in May to an eight-month low of 54.3 in June. This was consistent with a marked, but slower, improvement in business conditions. Moreover, the average performance of Q2 2017 (55.4) was weaker than in the opening quarter (56.7).

The overall improvement in operating conditions was supported by a sharp increase in new business wins. Favourable economic conditions, strong underlying demand and more construction projects were reported by panellists to be the key factors behind the rise in inflows of new business. That said, growth eased to an eight-month low. A two-month sequence of contraction in new export orders was followed by a modest expansion during June. Panelists mentioned that good quality of products and services, as well as discounts, helped them secure new work from abroad.

Amid reports of strong demand conditions, firms raised output further during June. Although the slowest in eight months, the rate of growth was sharp overall.

Increase in purchasing activity

In response to greater output requirements, firms increased payroll numbers at the fastest pace since August 2016. However, the overall rate of job creation was only slight.

In line with the trend for output, Saudi Arabian firms increased their purchasing activity again in June. Nonetheless, the rate of growth was the weakest observed since the inception of the survey in August 2009. Greater input buying contributed to higher input stocks. Although easing to the weakest in four months, the rate of accumulation was sharp overall and above the series trend.

The rate of input price inflation picked up from May’s survey-low, but was modest overall. As a result, the sector saw a renewed rise in output charges. The rate of charge inflation was marginal overall. Those firms that raised their average selling prices commented on the passing on of higher cost burdens to clients.

Firms remained optimistic towards the 12-month outlook for output, with panellists commenting on promotional activities and projections of further improvements in economic conditions. That said, confidence fell to an eight-month low.

UAE PMI; Sharp improvement in business conditions

Following May’s weakest improvement in six months, the upward growth trajectory of the non-oil private sector gained steam in June. The latest improvement was supported by sharper rises in both new orders and output.

The ongoing upturns in output and new order book volumes encouraged companies to engage in input buying, leading to further increases in inventories. Meanwhile, problems existed elsewhere as employment stagnated. New export orders fell for the first time in seven months as demand from international markets reduced.

Business confidence towards the 12-month outlook eased to the second-lowest in the survey history. Following a decline in the prior month, there was a renewed increase in input costs. In spite of increased cost pressures, firms continued to offer discounts amid reports of intense competition.

Firms continue to reduce selling prices

The survey, sponsored by Emirates NBD and produced by IHS Markit, contains original data collected from a monthly survey of business conditions in the UAE non-oil private sector.

Commenting on the UAE PMI survey, Khatija Haque, Head of MENA Research at Emirates NBD, said: “The rise in output and new orders in June is encouraging, although we note that firms continued to reduce selling prices on average in order to support demand and order growth.  The survey also highlights the lack of employment growth despite strong the strong increase in new work last month.  Overall however, the PMI data for H1 2017 supports our view that the non-oil sectors have grown at a faster pace relative to H1 2016.”

The headline seasonally adjusted Emirates NBD UAE Purchasing Managers’ Index (PMI) – a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy – rose from May’s six-month low of 54.3 to 55.8 in June. Remaining comfortably above the crucial 50.0 threshold, the latest reading signalled a sharp improvement in the health of the private sector. Notably, the rate of growth was stronger than the long-run series average (54.5).

Increase in output

The general improvement in operating conditions was closely linked to a sharper increase in output during June from May’s 13-month low. The combination of more projects, trends in new orders and favourable economic conditions was reported by panellists to have contributed to greater business activity.

Moreover, growth in new orders quickened from May’s five-month low to the fastest pace since August 2015. Firms linked the rise in new business to discounts and greater marketing efforts.

In response to greater output requirements, companies raised purchasing activity at a sharp pace. As a result, inventories rose at a steep pace. Firms mentioned forecasts of greater new work as the key reason behind the latest rise in inventories.

The rate of job creation eased to an eight-month low to signal a broad stagnation in employment.

Output charges decreased in June as firms were unable to pass on higher cost burdens to customers amid reports of intense competition. Input prices rose following a decline in May, although the rate of inflation was only modest. Input costs were mainly driven higher by a general increase in market prices for raw materials, according to panelists.

Positive sentiment towards business prospects eased to the second-weakest in the survey history. Firms expect projects in the pipeline, and further improvements in economic conditions will lead to output growth in the year ahead.