By Tim Fox
Growth in the UAE and Saudi Arabia is slower compared to 2014 and 2015, but cuts in government spending may have gone too far
The Emirates NBD Purchasing Managers’ Indices (PMIs) for June have recently been released, showing solid but slightly slower growth in the non-oil private sectors of the UAE and Saudi Arabia.
The monthly PMIs get a lot of coverage in the media, but how important are they really, and what exactly do they tell us? Probably one of the biggest advantages of the PMI data is its timeliness: the index is released just a few days after month-end, giving a quick snapshot of economic activity in the previous month. GDP data in the GCC is released with a relatively long time-lag (we still don’t have an official figure for the UAE’s growth in 2015), so the frequency and timeliness of the PMI is very helpful for analysts, businesses and policymakers alike. Indeed, the UAE central bank uses the PMI data as an input in its own statistical analysis and forecasting models.
The methodology for constructing the PMIs is standard around the world, making it easy to compare growth momentum in the GCC against that in China, the US and Europe, for example. The PMI is also easy to interpret. Fifty is ‘neutral’ or ‘no change’; a reading above 50 indicates expansion, and the higher the number, the faster the expansion. Similarly, a reading below 50 indicates contraction, and the further below 50, the deeper the contraction.
Although it is a good leading indicator, the PMIs cannot replace the official estimates for an economy’s growth. For one, it does not measure the value created in the economy in monetary terms, rather it simply reflects any change from the previous month. The UAE’s PMI is based on a survey of around 400 non-oil private sector firms, with the biggest sectors given more representation in the panel. Firms are asked to indicate whether a number of variables (such as production, new orders, employment and inventory) have increased, decreased or stayed the same from the previous month.
For both Saudi Arabia and the UAE, the PMIs have held up remarkably well over the last 18 months, against a backdrop of sharply lower oil prices and concerns about government spending cuts. In June, the UAE’s PMI stood at 53.4, while Saudi Arabia’s PMI was a touch higher at 54.4. Both are lower than June 2015, pointing to a slower pace of growth, but it is important to recognise that there is solid growth in both countries’ non-oil sectors.
While oil prices have indeed declined, oil production has remained relatively high, and this has in turn supported activity in the (oil related) manufacturing sector which is included in the PMI surveys. The PMI surveys also show that domestic demand has been the key driver of business activity and new orders, with export demand being quite soft so far this year. Again, this suggests that reports of substantial cuts in government spending may be somewhat overdone.
What has become increasingly evident from the PMI data in the first half of this year is that firms in both the UAE and Saudi Arabia have been very cautious about hiring new workers, even if their order books are healthy and their output is rising. It may be that these firms are becoming more efficient and more productive, which in the long run is a positive trend, but may also suggest that businesses are somewhat cautious about the outlook over the next few months, and are thus unwilling to incur the additional expense of hiring more staff just yet.
The PMI data also sheds some light on inflationary pressures in the non-oil private sector. In the UAE, firms’ input costs have increased at a faster rate than the prices they have charged nearly every month since the surveys began in August, 2009. In Saudi Arabia, this trend has been evident since the start of 2011. This is telling us that margins are being squeezed, as firms compete on price to secure more customers and new business. For consumers, this has helped to keep inflation contained and is also a sign of a more open and competitive market in the two biggest economies in the GCC.
Overall then, the high frequency PMI data paints a picture of slower growth in the UAE and Saudi Arabia this year, compared to 2014 and 2015. Nevertheless, the fundamentals appears to be solid, with domestic demand remaining the key driver of economic activity in the region, even as governments have adopted a more cautious stance with regards to spending. Firms appear to be adapting to a more challenging economic environment by ‘running lean’, increasing efficiencies and productivity to meet their clients’ demands without taking on much in the way of additional human resources, as they have in the past. Businesses are also absorbing any increase in production costs as they compete with each other to secure new work, in a more competitive environment.