Saudi Arabia non-oil sector growth hits 2018 high

Saudi Arabia non-oil sector growth hits 2018 high
Saudi companies ramped up their purchasing activity last month, as business confidence in the Kingdom returns. (Reuters)
Updated 03 July 2018

Saudi Arabia non-oil sector growth hits 2018 high

Saudi Arabia non-oil sector growth hits 2018 high
  • Saudi Arabia’s business conditions have benefited from increased government spending as well as a recovery in oil prices
  • Increased output and new work contributed to the overall improvement in growth survey found

LONDON: Growth in Saudi Arabia’s non-oil sector has reached its highest level this year as confidence in the Kingdom starts to return, a survey found.

The Emirates NBD/IHS Markit Purchasing Managers Index (PMI) — a measure of non-oil business conditions — increased to 55 in June from 53.2 in May, marking the highest reading of 2018.

The Kingdom’s PMI reading hit an all-time low of 51.4 in April. Anything below 50 would indicate a contraction in growth.

Saudi Arabia’s business conditions have benefited from increased government spending, as well as a recovery in oil prices, according to analysts.

“Overall, the June PMI data supports our view that the non-oil sector is recovering after a slow start to the year,” said Khatija Haque, head of MENA Research at Emirates NBD.

“An expected rise in oil production following last week’s OPEC meetings should also boost activity in the manufacturing sector in H2 2018,” she added.

Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note: “In Saudi Arabia, a raft of public sector bonuses has helped to offset the hit to incomes from austerity measures implemented at the start of 2018 and has supported stronger growth in consumer-facing sectors.”

Specifically, increased output and new work contributed to the overall improvement in growth, the survey found. Export orders also rose for the first time since January, though the increase is relatively slight compared to historic standards.

Saudi companies ramped up their purchasing activity last month as well, with the quantity of purchases index rising to 56 from 53 in May, marking the highest reading for 2018.

However, businesses in Saudi Arabia remain cautious, with the future output index declining sharply to 56.8 in June, with just 14 percent of businesses anticipating their output to be even higher this time next year.

In the UAE, the June PMI reading also rose to its highest level so far this year reaching 57.1 compared to 56.5 in May. Both output and new orders rose at their fastest pace so far in 2018.

While business activity increased, employment levels remain broadly the same, with less than 1 percent of firms surveyed reporting that they hired new workers in June.

“We expect firms to boost hiring in Q3 if new work continues to rise as strongly as it has in recent months,” said Haque.

UAE-based firms are more optimistic than their Saudi counterparts, with nearly 70 percent of those surveyed expecting their output will be higher in 12 months’ time.

“Overall, the June survey data supports our view that the UAE’s non-oil sectors will see faster growth this year relative to 2017,” said Haque.

Egypt’s non-oil sector continues to struggle, with June’s reading still below 50 for the second consecutive month, indicating a contraction in growth.

The measure of 49.4 was marginally higher than 49.2 recorded in May, marking a slightly smaller contraction in growth.

The sharp increase in Egypt’s input prices has raised concerns about inflation.

“On a worrying note, the price components of the Egyptian PMI rose last month. Having hit a two-year low of 11.5 percent year-on-year in May, inflation is likely to edge up in June and July on the back of recent subsidy cuts,” said Tuvey in a note.