Inflation doesn’t stop UAE’s biggest business upswing this year

Business conditions in the UAE improved in May to the strongest this year even as companies came under pressure from inflation and largely chose to absorb higher costs.

Output in the country’s non-oil economy increased at the fastest pace since last December and employment saw a renewed increase, according to a survey published by S&P Global on June 3.

The UAE Purchasing Managers’ Index rose to 55.6 from 54.6 in April, remaining above the 50 mark that separates expansion from contraction.

Despite the pickup, inflationary risks emerged more prominently, with business costs rising to the highest level in more than three years, as disruptions to supply chains around the world and the Russia-Ukraine crisis stoke prices.

“Following the global trend, the main headwind to the non-oil sector in May was inflation. PMI data suggest that companies are choosing to absorb extra costs rather than pass them onto customers, but this is unlikely to continue indefinitely,” said David Owen, an economist at S&P Global.

The nation isn’t immune to a recent run-up in global costs even as booming crude prices continue to power its economy. The government has already responded by increasing local fuel prices by more than 50 per cent since the beginning of the year and capping the costs of essential food items.

Still, inflation in the UAE is expected to be at 3.7 per cent this year before sliding to 2.8 per cent in 2023, among the lowest levels globally, according to the International Monetary Fund.

Further inputs from the survey revealed, the rate of job creation in the UAE was quickest in seven months. Moreover, strong price competition led companies to refrain from passing on higher costs to customers.

Finally, firms were hopeful about an increase in output over the next year and business confidence picked up slightly from the previous month but was overall weaker than the historical trend.