Growth in the UAE’s non-oil private sector experienced its weakest June of the post-COVID period, as fallouts from the Iran conflict weighed on client activities across the Gulf major. The seasonally adjusted S&P Global UAE Purchasing Managers’ Index (PMI) fell from 52.6 in May to 50.8 in June, slightly above the 50 baseline that separates economic growth from contraction.
The employment data contracted as well, at its sharpest rate since August 2020. As per S&P Global, the operating conditions for the businesses were also the weakest since February 2021. A slowdown in demand growth also led the Dubai PMI to fall to 50.7 in June, from 52.0 in May, representing the weakest improvement in the non-oil private sector since January 2021.
Sales growth was reportedly curbed by continued spending delays and reductions in travel due to the regional volatility.
“The impact of the Middle East conflict continued to weigh on firms despite resilient domestic spending and public investment growth that continued to support firms. A robust sales pipeline, construction projects, and digital services expansion provided pockets of strength but were unable to offset the broader weakness,” the PMI report said.
“New business growth, which, despite accelerating to a three-month high, also remained well below the historical average, as customers delayed spending decisions. Tourism sector weakness and elevated price pressures were highlighted as dampeners on demand. Consequently, the labor market also experienced its first contraction in over four years,” it added further.
Capacity pressures (a phenomenon in which demand for goods and services outpaces the available supply of workers, factories, and materials) remained muted in June, with backlogs accumulating at the second-slowest pace in 2.5 years. As per S&P Global, where a rise was observed, firms cited production planning delays caused by shipment disruptions and raw material price volatility related to the disruptions at the Strait of Hormuz.
However, not everything was gloom and doom in the PMI data, as supply chain performance witnessed an improvement at the fastest rate in four months, with the easing of shipping bottlenecks in the Strait of Hormuz. The geopolitical volatility also put a squeeze on the Q2 profitabilities of businesses, as input costs recorded a sharp increase linked to transport fees and commodity inflation.
“On the output side, firms raised their selling prices modestly in June, but the increase was softer than that for input costs. Despite cost inflation and a softening in output growth, the market remains optimistic with government investment anchoring business confidence, although those dependent on external conditions expressed caution,” the PMI report observed.
“Looking ahead, recent moves towards an easing of geopolitical tensions in the region should help firms recover demand and normalize supply chains—indeed, the greater movement of shipping along the Strait of Hormuz in June led to shorter delivery times,” David Owen, principal economist at S&P Global Market Intelligence, said.
“Despite pressures, businesses raised output, with the rate of expansion picking up to the fastest since March. Although capacity strains and rising operating costs contributed to a decrease in staff numbers in June, the pace of job losses was the quickest recorded in 5.5 years,” he concluded.