Business activity at 3-month low

Private sector business activity in the UAE hit a 3-month low in June as input cost pressures remained elevated, a purchasing managers’ survey showed on Tuesday.

The HSBC UAE Purchasing Managers’ Index (PMI), which measures the performance of the OPEC member’s manufacturing and services sectors, fell from 56 in May to 55.2 in June (its lowest reading for three months), but the PMI remained above its long-run trend. A reading above 50 indicates economic expansion.

“The headline number has softened for a second consecutive month, suggesting that the lift the UAE received from unrest elsewhere may be fading,” said Simon Williams, chief economist for Middle East & North Africa at HSBC.

“There’s enough in the data, though, to persuade me that the underlying recovery is still underway. Output was up in June, if less markedly than in May, the new order book still looks strong and employment is still gaining. Output price rises also lost pace in June, supporting our view that overall inflationary pressures are weak and likely to stay that way,” he said.

Output levels at UAE non-oil private sector firms rose for the 17th month running in June, albeit at the slowest pace since last September. Panellists indicated that gains in new business underpinned the latest expansion of output, which was more marked at medium-sized companies than at small or large firms.

Growth of total new work was the second-sharpest in the twenty-three month survey history in June. Anecdotal evidence suggested that favourable market conditions, new product launches and competitive pricing all supported demand. New export orders also rose at a near-survey record pace, despite the rate of expansion slowing.

Panellists reported an accumulation of unfinished business in June as new workloads increased. Backlogs have only risen twice in the survey history (the other occasion being in April).

To accommodate current and expected growth of new work, UAE non-oil private sector companies raised buying activity, built up input stocks and hired additional staff in June. Purchases rose at a near-survey record pace, although inventory growth was more modest. Some firms noted that purchasing activity increased to hedge against future input price inflation. Job creation, meanwhile, was only moderate and the mildest since November last year.

Vendor performance continued to improve during the latest survey period, albeit at the slowest rate in the series history. Respondents cited good business relationships, cash payments, strong competition amongst suppliers and efficient service as the main reasons for faster deliveries.

Inflation of both purchase prices and staff costs eased during June, but remained elevated compared to respective survey averages. Stronger demand for inputs and difficulties caused by the recent earthquake in Japan were given as the primary upward influences on purchase prices, while strong business performance, productivity gains and greater living costs were the main reasons for higher salaries and wages.

Companies continued to pass through some of their input cost increases to customers in June. However, charge inflation was the weakest since February.

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