UAE business conditions improve amid dim optimism

A renewed improvement in the private sector economy saw business conditions improve for the third time in four months in September, albeit businesses again showed little optimism for future activity.

The latest PMI survey data shows that the degree of confidence improved from August's record low, but was still the second-weakest in the survey series history, as firms suggested recovery would be subdued.

The headline PMI posted rose from 49.4 in August to 51.0 in September, the highest reading for 11 months and marking a renewed expansion in the non-oil private sector. It was for the third time since the Covid-19 lockdown measures began that the index surpassed 50. The index remained well below its trend level of 54.3, however, and signalled only a slight uplift in overall business conditions.

The improvement was driven by a faster increase in output levels and an additional rise in new work. "However, concerns remained of a weak outlook for the economy and ongoing cash flow issues for companies, leading to a further - albeit slower - cut to employment," the survey report said.

Demand was also partly driven by discounts, which reached the strongest since the end of 2019. Companies also reported a further increase in output at the end of the third quarter, extending the run of growth to four months.

"Notably, the expansion quickened from August, but was still weaker than the recent high in July. Rising activity levels were supported by a solid upturn in new business, as companies noted a further rebound in consumer demand following softer Covid-19 restrictions," said the report.

David Owen, economist at IHS Markit, said ongoing Covid-19 restrictions have led to the PMI figure hovering around the 50.0 level in recent months as, despite higher output and new business, firms have continued to lower job numbers in an effort to cut expenses and manage cash flow. "Higher demand was also supported by strong discounting efforts in September, the greatest since the end of 2019."

"More concerning is a recent rise in confirmed Covid-19 cases that could lead to lockdown restrictions being re-imposed in the future. Given the weak nature of the current rebound, any further measures could lead to a 'double-dip' in business activity. Reflecting the weak outlook, business sentiment was at its second-lowest level on record, only just above August's historic low," said Owen.

Companies that lowered workforce numbers noted that constraints on cash flow and business expenses remained severe, said the report. "These constraints were also evident in inventories data, as UAE firms reduced spending on purchases for the first time in the recent period of output growth."

In Saudi Arabia, September PMI data indicated a return to growth for the non-oil private sector, as the economy continued its path to recovery after the pandemic lockdown. Indices for output, new business and exports all signalled renewed expansions at the end of the third quarter, while employment fell at the softest rate since March

Owen said the uptick in business activity in the Saudi Arabia was supported by a return to sales growth as the economy started to find its footing after the lockdown. "Despite some businesses continuing to see a drag from ongoing restrictions, most companies saw market conditions improve. In addition, the impact of a rise in VAT notably softened, after a sharp rise in prices and a dip in sales were seen in August."