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Red Sea disruption has ‘modest impact’ on UAE business

UAE witnessed a robust expansion in the non-oil private sector

The UAE witnessed a robust expansion in the non-oil private sector with rising new business inflows leading to a marked uplift in activity as the disruption to supply lines resulting from the Red Sea attacks appeared to have a modest impact on the sector in January, the first Purchasing Managers’ Survey of 2024 shows.

Only a few UAE firms have reported delivery delays, aggregate backlogs rising, and higher shipping costs due to the Red Sea disruptions, S&P Global said in its survey report. “At the same time, an increase in transport costs underlined a faster rise in purchase prices than in December. Businesses also mentioned that greater material prices and salary adjustments pushed up expenses solidly.”

The UAE has expressed grave concerns over the repercussions of the attacks on shipping vessels in the Red Sea, terming it “an unacceptable threat” to the security of the region. The attacks have disrupted trade flows, adding headwinds to a fragile global economy. Top shipping companies such as Maersk, Hapag Lloyd, and MSC have decided not to use the Red Sea, pausing their ships before traversing the Bab-el-Mandeb strait on their way to the Suez Canal. Some ships have been diverted around Africa’s Cape of Good Hope, adding significant delays and costs.

The seasonally adjusted S&P Global UAE Purchasing Managers’ Index (PMI) dropped from 57.4 in December to 56.6 in January, the lowest reading in five months.

While the rate of output growth slipped to a five-month low, “strong demand, greater customer numbers and promotional activity underlined the improvement in operating conditions in January. While job creation slowed, a pick-up in supply-chain risks led to a quicker increase in firms’ input costs,” the report said.

“The PMI trend reflected a sharp, but slower, expansion in non-oil output in January. The rate of growth eased to the least marked since August 2023. Nevertheless, it was still much stronger than the long-run average (since 2009),” the survey report said.

The Central Bank of the UAE has revised upward its 2024 growth forecast for the nation to 5.7 per cent from its earlier estimate of 4.3 per cent, due to an expected rise in oil production this year. The CBUAE also raised the UAE’s non-oil gross domestic product growth for 2024 to 4.7 per cent.

David Owen, senior economist at S&P Global Market Intelligence, said while the UAE non-oil economy largely continued where it left off at the end of 2023, the PMI’s dip to 56.6 in January pointed to a slight moderation of growth from the sector’s best quarterly performance in four-and-a[1]half years.

He said output and new order growth stayed above their long-run trends but softened, with the former easing to a five-month low. “More striking was a waning of employment growth to the weakest since December 2022, as strong demand and business optimism failed to translate into greater hiring.”

Owen said the disruption to supply lines resulting from the Red Sea attacks appeared to have a modest impact on the UAE non-oil sector in January, with a few firms noting delivery delays, aggregate backlogs rising, and reports of higher shipping costs by survey respondents. “The impact on inflationary pressures so far has been notable but not severe, as input costs rose at a faster rate than in December but remained slower than in the preceding three months.”

According to the survey, non-oil businesses reported only a slight rise in their staffing levels during January as strong demand and business optimism failed to translate into greater hiring. Businesses also mentioned that greater material prices and salary adjustments pushed up expenses solidly. The business confidence regarding year-ahead outlook for activity was positive and roughly on par with the 2023 average, the survey noted.

Despite sales and output momentum staying robust, UAE non-oil businesses reported only a slight rise in their staffing levels during January. Notably, the pace of growth was the slowest in just over a year. On the other hand, purchases of inputs continued to grow sharply as firms looked to boost.