Expo 2020 Dubai.
March provided UAE businesses with another solid set of results - now they are waiting for the post-Expo bounce. Image Credit: Expo 2020 Dubai

Dubai: The UAE’s private sector put in another round of strong growth during March, with new business orders almost near pre-Covid levels. But they are also keeping a close watch on the inflationary pressures that could hurt profitability this year.

On the plus, businesses in the UAE continue to hire. Even then, here too, the rate of job gains is still stuck in a range as employers prefer to keep their labour costs in check, according to the latest update from IHS Markit, the research firm.

“The rate of new business growth at UAE non-oil firms was unchanged since February, and remained close to the post-pandemic high seen in November 2021,” says IHS Markit.

The UAE’s PMI (Purchasing Managers Index) for March recorded a healthy 54.8, well above the median 50. It indicated businesses ramping up capacity steadily to get back to pre-pandemic numbers. Incoming orders - which had shown steady increases over the six-month Expo phase - show every indication of holding up in the weeks ahead.

"UAE companies remained confident of a rise in activity over the year ahead in March, often citing recent improvements in sales and overall economic conditions," the report notes. "However, concerns about inflation, shipping and the attack on Ukraine weighed partly on overall confidence."

Shipment delays

Market sources suggest that curbing inflation-linked cost pressures will be the biggest challenge businesses will have to face. On the supply chain side, the movement of goods are yet to get anywhere near the levels seen ahead of the pandemic outbreak. Across all key sectors, these are the factors businesses are trying to get a grip on.

According to David Owen, Economist at S&P Global, "A strong rise in demand across the non-oil economy in March masked the concerning threat posed by global commodity prices. With energy and raw material costs rising around the world in response to the Russia-Ukraine conflict, UAE firms faced a sharp increase in purchase prices and the most marked rise in overall price pressures for more than three years."

"There is the risk that a drop in material and energy availability will add to supply chain problems that first appeared during lockdown measures. However, current data suggest that conditions are improving for now, as delivery times shortened at the joint-fastest rate in 20 months."

The shortening of delivery times does spell out hope for key sectors such as retail, which is up for a sizeable boost from the upcoming Eid-related demand by later this month or early April. The other massive gain that the UAE economy will take on board is the strong return being made by the travel sector, with most airlines running at full - or near-full - capacity.

Upbeat on prospects

"The strong rise in demand fed through to a substantial increase in business activity during March, with nearly a quarter of surveyed firms signalling output growth," the IHS Markit report notes. "As well as higher demand, panellists stated that marketing efforts and new product releases supported overall activity."

An eye on costs
Cost-related pressures "quickened to a 40-month high" for businesses, from rising fuel and raw material prices due to supply concerns relating to the conflict in Ukraine.

"The rate of input cost inflation was faster than the series average and solid," IHS Markit reports on the March PMI numbers. "Efforts to pass-through higher costs to customers at some businesses meant that average output charges fell to the least extent in the current eight-month run of decline."

According to David Owen, "Given that the recovery in sales has been reportedly helped by price discounts since the second half of 2021, firms now face a difficult decision - whether to pass on higher costs and risk a drop-off in demand or face a hit to their profit margins."