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Dubai's startegy to rev up growth in travel and tourism space is paying off handsomely, buy retail activity and construction showed signs of softness. Image Credit: Dubai Media Office

Dubai: Led by tourism, Dubai’s private sector recorded its strongest growth in nearly three years during May. But on one side, cost pressures too are building up, driven in the main by ‘ongoing volatility in global energy markets’, according to the latest PMI update from S&P Global.

Of the three key sectors driving Dubai’s private sector activity, two showed signs of softness. “On new orders side, travel & tourism was the only sector to see an acceleration in growth in May, rising to the quickest pace for nearly three years,” said David Owen, Economist at S&P Global Market Intelligence. “By comparison, wholesale and retail growth eased to a three-month low, while construction recorded the first decrease in new work since last September, as both businesses and households battled with rising inflationary pressures.”

The PMI (Purchasing Managers Index) reading for Dubai in May was at 55.7, from 54.7 in April, ‘indicating a robust improvement in the health of the non-oil private sector’. This is the highest since June 2019. The PMI reading is based on new orders, business output, employment, inventory, and supplier delivery times. A reading over 50 means the economy is in growth mode.

Worrisome about construction

In May, the months of sharp increases in material prices seem to have finally slowed down project activity. In wholesale and retail, businesses reported a dip in new order growth. ‘Weakness in these two sectors came amid a sharp increase in input costs in May,” says S&P Global in the May report. “The pace of inflation in the non-oil economy quickened to the fastest in just over four years, as firms particularly noted the impact of rising fuel prices due to the war in Ukraine. Other items such as steel, aluminium, chemicals and timber were also cited as up in price”

His is all playing into the concerns of business owners, with the degree of optimism about the immediate future slipping to levels last seen a year ago. They will also need to prepare for the higher cost of funding, with the US Federal Reserve all set to have another hike in interest rates and which will be matched locally.

"The uplift in input costs also placed further pressure on firms' margins, amid additional reports of charge discounting,” said Owen. “This contributed to a more subdued outlook for future activity."

May’s manic activity
According to S&P Global, “Strong new business growth remained a prominent feature of the non-oil economy during May, as survey panellists often noted an improvement in client demand as markets recovered from the pandemic. Notably, the upturn accelerated from April and was the second-fastest in nearly three years.”