UAE non-oil sector grows, but supply chain problems worsen

10 August 2021

Growth in the UAE non-oil economy reached its fastest rate in two years in July, as demand continued to rebound from the Covid-19 pandemic. 
A sharp rise in new orders put increasing pressure on business capacity and created a marked expansion in output, according to the seasonally adjusted IHS Markit UAE Purchasing Managers’ Index. Employment also rose at the fastest rate since January 2019, the data for July showed.
However, delays to shipments from Asia led to the worst lengthening of suppliers’ delivery times since April 2020 and contributed to a quicker rise in input costs. 
The index, a composite indicator designed to give an accurate overview of operating conditions in the non-oil private-sector economy, rose from 52.2 in June to 54.0 in July. This was the strongest improvement in business conditions in exactly two years. 
Output and new orders followed the same trend in July, moving to their highest levels since July 2019. The rise in new orders was the eighth in nine months, and businesses reported a further recovery in demand as Covid-19 restrictions eased. 
However, export sales fell for the third month in a row in July, as ongoing pandemic measures in other parts of the world continued. This led to firms increasingly turning to domestic clients to help recover new business, the survey data showed.
Tighter Covid-19 restrictions in Asia due to rising cases meant that lockdown measures also hit the supply of inputs at the start of the third quarter. This was most notable in the UAE, where firms reported the second-worst lengthening of input lead times in the survey history, behind only that seen in April 2020 at the height of the global pandemic. 
Output expanded much more quickly in July than in June, which firms said was due to higher demand, project work and the rollout of new products and services. However, a sharp growth in new orders and input delivery delays led to a renewed increase in backlogs of work, the biggest for 16 months. 
Overall costs rose at one of the fastest rates in the last three-and-a-half years, linked to shortages of raw materials such as steel and cement. 
Higher input costs were again partly passed on to customers as output charges rose for the second month in a row. However, efforts by other firms to keep prices low in order to stimulate demand meant that the overall rise was only marginal.
There was also an increase in employment in July, the data found. The rate of job creation was the fastest since January 2019, albeit by a slim margin. Firms also expanded their purchasing activity in July, after a slight decrease in June. 
Companies surveyed hoped the easing of Covid-19 restrictions and the delayed Expo 2020, now scheduled to start later this year, would help to improve economic conditions, and also hoped the outlook for non-oil activity would remain positive.
However, overall business expectations declined from the previous survey period.
David Owen, economist at IHS Markit, said the UAE’s non-oil sector firms saw the sharpest rise in new orders for two years amid soaring domestic sales and strengthening market confidence. 
“At 54.0 in July, the headline PMI was broadly at its long-run level to suggest the economy was largely back to normal growth,” Owen explained. “That said, there were many firms reporting that output had not yet recovered to pre-Covid levels. 
“Moreover, new orders from abroad disappointed again in July as sales were hindered by pandemic-related measures around the world. With Covid-19 cases re-accelerating in Asia, firms also pointed to a worsening of supply chain problems. In fact, delivery times lengthened to the greatest extent since the onset of the pandemic in April 2020.” 

Growth in the UAE non-oil economy reached its fastest rate in two years in July, as demand continued to rebound from the Covid-19 pandemic

A sharp rise in new orders put increasing pressure on business capacity and created a marked expansion in output, according to the seasonally adjusted IHS Markit UAE Purchasing Managers’ Index.

Employment also rose at the fastest rate since January 2019, the data for July showed.

But delays to shipments from Asia led to the worst lengthening of suppliers’ delivery times since April 2020 and contributed to a quicker rise in input costs. 

The index, a composite indicator designed to give an accurate overview of operating conditions in the non-oil private-sector economy, rose from 52.2 in June to 54.0 in July. This was the strongest improvement in business conditions in exactly two years. 

Output and new orders followed the same trend in July, moving to their highest levels since July 2019. The rise in new orders was the eighth in nine months, and businesses reported a further recovery in demand as Covid-19 restrictions eased. 

However, export sales fell for the third month in a row in July, as ongoing pandemic measures in other parts of the world continued. This led to firms increasingly turning to domestic clients to help recover new business, the survey data showed.

Tighter Covid-19 restrictions in Asia due to rising cases meant that lockdown measures also hit the supply of inputs at the start of the third quarter. This was most notable in the UAE, where firms reported the second-worst lengthening of input lead times in the survey history, behind only that seen in April 2020 at the height of the global pandemic.

Output expanded much more quickly in July than in June, which firms said was due to higher demand, project work and the rollout of new products and services. But a sharp growth in new orders and input delivery delays led to a renewed increase in backlogs of work, the biggest for 16 months. 

Overall costs rose at one of the fastest rates in the last three-and-a-half years, linked to shortages of raw materials such as steel and cement. 

Higher input costs were again partly passed on to customers as output charges rose for the second month in a row. However, efforts by other firms to keep prices low in order to stimulate demand meant that the overall rise was only marginal.

There was also an increase in employment in July, the data found. The rate of job creation was the fastest since January 2019, albeit by a slim margin. Firms also expanded their purchasing activity in July, after a slight decrease in June. 

Companies surveyed hoped the easing of Covid-19 restrictions and the delayed Expo 2020, now scheduled to start later this year, would help to improve economic conditions, and also hoped the outlook for non-oil activity would remain positive.

Despite this, overall business expectations declined from the previous survey period.

David Owen, economist at IHS Markit, said the UAE’s non-oil sector firms saw the sharpest rise in new orders for two years amid soaring domestic sales and strengthening market confidence. 

“At 54.0 in July, the headline PMI was broadly at its long-run level to suggest the economy was largely back to normal growth,” Owen explained. “That said, there were many firms reporting that output had not yet recovered to pre-Covid levels. 

“Moreover, new orders from abroad disappointed again in July as sales were hindered by pandemic-related measures around the world. With Covid-19 cases re-accelerating in Asia, firms also pointed to a worsening of supply chain problems. In fact, delivery times lengthened to the greatest extent since the onset of the pandemic in April 2020.” 

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