x Abu Dhabi, UAEFriday 21 July 2017

Business activity in UAE rises to a peak

Private sector business activity nudged to a new high last month but pricing pressure also surged to a record peak.

The regional turmoil is yet to weigh on business activity, says Simon Williams, HSBC's chief economist for the Mena region.
The regional turmoil is yet to weigh on business activity, says Simon Williams, HSBC's chief economist for the Mena region.

Business activity in the UAE edged to a new peak last month as private-sector commerce strengthened despite the protests across the Mena region.

Nevertheless, pricing pressure intensified during February as non-oil companies began to pass on higher costs to customers, according to HSBC's purchasing managers' index (PMI).

As a result input and output prices both accelerated at their fastest rate in the survey's 19-month history.

"The recovery is on but still slow," said Simon Williams, HSBC's chief economist for the Mena region. "The regional unrest is yet to weigh on business activity as it will take time for investment plans to adjust and for any effect on new orders."

Last month's seasonally adjusted headline PMI rose to a peak of 54.3, up slightly from 54.2 in January. The PMI has now registered above 50, the threshold for no change, for 18 months.

Next month's data should offer a clearer indication of the impact of recent turmoil in Tunisia, Egypt, Libya and elsewhere, said Mr Williams. Many companies in the UAE have trade and investment links with regional economies hampered by a paralysis of commerce because of the unrest in parts of the Mena region.

New orders rose last month at a sharp pace, with the latest increase the second-highest in the survey's history. Improvements in both domestic and foreign demand contributed to the rise, although business at home accounted for the lion's share of new expansion. More than a quarter of the surveyed companies recorded a gain in new orders compared with January, citing favourable economic conditions, company expansions and new products among drivers of growth.

To accommodate more orders, companies increased purchases of stock.

Job creation was the highest last month in four months, with 9 per cent of companies hiring additional staff. The rise represented the 19th consecutive month in which respondents added to their workforce.

Despite employment gains, the data showed few companies increased wages.

Less than 2 per cent of firms surveyed said their salary bill had increased.

In contrast, other financial outgoings during the month rose. A total of 18 per cent of firms reported rises in overall spending on inputs. Higher fuel and raw material costs were chiefly responsible for the increase.

Prices for materials as diverse as copper and cocoa have risen in recent months. To offset these increases, companies raised charges for goods and services.

"There's pressure on profit margins and on wages as the demand environment is not strong enough to feed through entirely to higher consumer costs," said Mr Williams.

As a result, the moderate increase in output costs was still not enough to raise the likelihood of a significant pick-up in inflation, he said.

Consumer prices rose 1.6 per cent in January compared with the same month last year, according to the latest figures from the National Bureau of Statisics. But the index slid by 0.27 per cent in January from December, the data released this week show.

tarnold@thenational.ae