Two biggest Gulf economies boom and turn corner on inflation

The two biggest Gulf Arab economies are already seeing inflationary pressures abate while business activity is picking up.

Charges set by non-oil companies slipped last month in the United Arab Emirates, helped by a decline in input costs, according to S&P Global. Both input cost and output price inflation slowed in Saudi Arabia.

Growth in the Saudi non-oil economy reached a 10-month high in August, with S&P’s Purchasing Managers’ Index (PMI) for the kingdom rising to 57.7 from 56.3 in July. Its PMI for the UAE was at 56.7, up from 55.4 and well above the 50-mark separating growth from contraction.

In Egypt, where S&P suggested inflation is slowing, the index rose to 47.6 in August, the highest reading since February, from 46.4 in July.

A drop in fuel prices in the UAE contributed to the country’s first decrease in input costs since January 2021. “The data offers hope for other countries struggling with persistent inflation, although concerns remain that global energy supply constraints will continue to push prices higher,” said David Owen, economist at S&P Global Market Intelligence.

The upswing in the region stands in contrast to a slowdown in much of the world economy. At the same time, prices for key raw materials — from oil to copper and wheat — have cooled in recent weeks and supply chains are starting to recover from the pandemic.

Price pressures in oil-rich Gulf region were already more subdued than elsewhere, thanks in part to limits on domestic fuel costs in some states.

In the UAE, input costs in the non-oil economy soared to an 11-year high earlier this year, according to S&P. Neighbouring Saudi Arabia, which is on track to be this year’s fastest-growing economy in the Group of 20, is also benefiting from a moderation in global commodities prices.

Saudi charge inflation saw one of the “most marked” monthly slowdowns in the series history, while the overall rise in selling charges was “only slight” and the softest since February, S&P said. Employment levels in the kingdom rose for a fifth month, though at a slower pace than in July. Business confidence remained “firmly upbeat,” according to S&P.

By contrast, UAE non-oil firms turned less optimistic and sentiment fell to its lowest in almost one-and-a-half years, in part because of “increased uncertainty about the health of the global economy,” S&P said.

In Egypt, business activity weakened – but at the slowest pace since the Russia-Ukraine crisis. Output and new orders increased with signs price increases were easing for companies.

“August saw the key PMI metrics move in the right direction,” Owen said, citing the second monthly increase in a row and the continuing decline in prices from recent peaks. Egypt’s statistics agency is due to announce August inflation data later this month.

While new orders decreased at the softest rate since April, a lack of raw material supplies had constrained total output. Weak market conditions, high inflation and sustained supply problems had dampened overall sentiment. “Monetary policy uncertainty, a weakening exchange rate, and the continued crisis in Ukraine mean there are still high levels of risk for the economy over the rest of 2022,” Owen said.