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Thu 3 Sep 2020 10:05 AM

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How business conditions have deteriorated in Gulf's biggest economies

Non-oil private sector activity in Saudi Arabia and the UAE falls below the threshold that separates growth from contraction in August

How business conditions have deteriorated in Gulf's biggest economies

Business conditions took a turn for the worse in the three biggest Arab economies, a deterioration accompanied by job losses that accelerated to a record pace in the UAE.

After having stabilised in July, a measure of non-oil private sector activity in Saudi Arabia, Egypt and the UAE worsened in each country last month and was below the threshold of 50 that separates growth from contraction, according to Purchasing Managers’ Index surveys compiled by IHS Markit.

In the UAE, business sentiment for the next 12 months fell to the lowest in the series history.

The headline reading for the UAE showed the first drop in operating conditions in three months, falling to 49.4 in August from 50.8 in July.

Saudi Arabia’s PMI retreated to 48.8 from 50, driven by a “solid drop” in new business after the kingdom’s tripling of value-added tax depressed consumer demand and continuing efforts to stop the virus.

The IHS Markit Egypt PMI was at 49.4, down slightly from 49.6 in July; firms saw increases in output and new orders, but “job losses remain strong”.

The setbacks highlight the uneven path to recovery in nations still coping with the aftershocks of the oil-market rout and the global pandemic.

It’s a pattern seen elsewhere around the world as conditions deteriorated in some Asian economies, with Malaysia’s manufacturing gauge slipping into contraction last month. Companies cut jobs again and reduced inventories in Europe despite output growth.

Different factors are at play in the Middle East. Austerity measures like Saudi Arabia’s VAT hike contributed to the kingdom’s steepest increase in input costs since 2012 while output charges grew at the fastest rate in 11 years.

Still, the fall in the country’s workforce was the slowest since May and confidence among firms improved to a six-month high.

The UAE is seeing a resurgence of new virus cases as companies are still adjusting to the damage already caused by the disease. Output growth declined to a three-month low and the IHS Markit’s PMI Employment Index dropped to its lowest in more than 11 years of data collection.

“Jobs data imprinted fresh concerns for the UAE non-oil private sector economy,” said David Owen, economist at IHS. “For most businesses, the cut to jobs allowed them to remain in-step with the muted economic recovery after lockdown, as demand growth failed to gain further momentum.”

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