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| 05 February, 2018

VAT impact blamed as Saudi's non-oil economy growth slows

New order growth and business activity levels slow, but job creation and wage growth strengthens

Investor with growth chart of profits.
Image used for illustrative purpose only.

Investor with growth chart of profits. Image used for illustrative purpose only.

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Growth in Saudi Arabia’s non-oil economy weakened in January, new survey data has shown.

The Emirates NBD Saudi Arabia Purchasing Managers Index (PMI) fell to 53 in January - down from 57.3 in December, and a 10-month high of 57.5 achieved in November last year.

The slowdown was attributed to weaker rates of business activity and new order growth, with survey respondents citing "intense competition for new work and temporarily softer demand following the introduction of VAT [value-added tax] at the start of 2018", according to a press release on Monday announcing the results.

Any ranking in the index above 50 represents an expansion in the economy, and below 50 a contraction.

Khatija Haque, head of MENA research at Emirates NBD, said: “The softness in the January PMI survey was fairly broad-based, with faster employment growth being the main highlight. Wage increases, fuel subsidy cuts and the introduction of VAT is evident in the higher input costs and staff costs components of the survey in January. However, firms were the most optimistic about their prospects in the coming 12 months than they have been since May 2017."

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The rate of job creation recorded in the non-oil economy was the fastest in a year-and-a-half, and staff wages increased at their fastest rate since September 2016, the survey data found.

The United Arab Emirates, which also introduced VAT at a rate of 5 percent in January, also witnessed a slowdown in the growth of its non-oil economy, but it was less pronounced - the UAE PMI Index dropped to 56.8 percent, down from 57.7 percent in December.

UAE purchase costs rose at their fastest rate since November 2011, the data showed, but purchasing activity slowed, suggesting that firms had been building up stocks in advance of the introduction of VAT.

The survey also showed a significant improvement in business confidence, with panellists forecasting that activity increases once the VAT system becomes more familiar.

Meanwhile, Egypt's non-oil economy remained in a state of contraction, but only just - the Egypt PMI rose to 49.9 in January - up from 48.3 in December.

(Writing by Michael Fahy; Editing by Shane McGinley)

(michael.fahy@thomsonreuters.com)

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