The output expectations for the year ahead were upbeat in July, climbing to the second-highest level in just over a year. Image Credit: WAM

Dubai: The UAE non-oil economy continued to grow strongly in the beginning of the second half of 2023, as companies increased their activity levels significantly and reported more hiring and increased purchases of inputs. The robust output growth was accompanied by a sharp increase in sales, although at a slower pace due to competitive pressures. Companies were able to lower their selling prices again, aided by lower input cost inflation and sufficient inventory levels.

The seasonally adjusted S&P Global UAE Purchasing Managers' Index (PMI), a composite indicator designed to assess operating conditions in the non-oil private sector economy, decreased from 56.9 in June to 56.0 in July. However, it remained comfortably above the 50.0 no-change mark and the series' long-run average, indicating a significant improvement in the sector's health, supported by substantial output expansion.

Though the rate of activity growth slowed from June's recent peak, it was still considerable at the start of the third quarter, with about 30 per cent of survey respondents reporting a rise in output compared to less than 2 per cent reporting a fall.

The rise in activity was driven by an increase in new orders, which were still boosted by strong customer demand and improving market conditions, according to the survey participants. However, growth moderated since June, with the drop in the respective index being one of the largest in the series' history (since 2009). Anecdotal evidence suggested that several companies faced increased competition, which affected their sales. New export orders, on the other hand, remained relatively stable.

"The latest PMI data pointed to a slight recalibration of the strength of the UAE non-oil economy in July, as new business growth slowed from its four-year high in June and the output expansion subsequently lessened," said David Owen, Senior Economist at S&P Global Market Intelligence. "Nevertheless, the headline PMI reading of 56.0 showed that the sector remained in good health in general, with market conditions continuing to improve and firms reporting strong rates of both customer demand growth and job creation."

The overall sharp rise in new orders encouraged companies to expand their workforce moderately. Nevertheless, there was a significant increase in backlogs of work due to demand pressure, project delays, and delays in client payments and shipments. This rise in backlogs was the highest since March 2020.

Improvement in supplier delivery times

Non-oil companies also experienced an improvement in supplier delivery times, as they requested faster input arrivals from vendors. This improvement encouraged companies to increase their input purchasing and inventories, although the rate of buying growth was the slowest seen in four months.

"At the outset, the July findings signalled that the UAE non-oil sector will continue on its expansion path in the second half of this year,” said Owen. “That said, the easing of sales growth was substantial and, if accelerated in future months, suggests that the demand boom could have reached its peak."

Easing of cost pressures

Companies also reported a decrease in cost pressures in July, with overall input price inflation reaching a three-month low and being only marginal. Lower commodity prices and freight costs helped limit supplier price increases, and salary pressures also diminished noticeably.

This cooling down of inflationary pressures led to another round of price discounts in July. Selling prices fell at a moderate pace similar to June, as companies offered special deals to clients amid competitive pressures.

Finally, output expectations for the year ahead were positive in July, reaching the second-highest level in just over a year. Survey participants often based their growth forecasts on improving economic conditions and stronger marketing and sales pipelines.