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Saudi non-oil private sector continues to grow albeit at a slower pace: IHS Markit

Oil hits two-year high, Brent near $72

The Saudi Arabian non-oil economy recorded a solid expansion in August, albeit in a slower growth rate compared to July,  as output expanded at the weakest pace for ten months, data firm IHS Markit revealed in IHS Markit PMI report.

The IHS Markit Purchasing Managers’ Index (PMI) report issued in September shows that, Saudi private firms new orders also rose to a lesser extent amid a softer recovery in export demand.

Moreover, Saudi Arabian businesses continued to report high levels of excess capacity and

a subdued outlook for future output.

Meanwhile, employment growth remained negligible while stocks of purchases increased

at the slowest pace since last October.

While output charges rose at the strongest rate for a year despite only a modest uptick in input costs.

The headline seasonally adjusted IHS Markit Saudi Arabia Purchasing Managers’ Index™ (PMI) decreased from 55.8 in July to 54.1 in August.

The reading signalled a solid improvement in the health of the non-oil private sector, albeit one that was the slowest in five months.

The majority of the 1.7-point fall in the PMI was driven by the Output Index, which dropped sharply to its lowest level since October 2020. That said, the index still pointed to a solid rise in non-oil activity, one that was commonly linked by survey panellists to demand improvements and the easing of travel

measures.

According to IHS Markit Economist David Owen, Saudi Arabia’s non-oil economy went slightly off the boil in August.

“Whilst domestic orders remained strong and firms saw an upturn in tourist numbers, many businesses continued to find market conditions challenging amid the pandemic. That said, demand momentum is still largely on the upside, with nearly three times as many firms seeing a rise in new

orders as those registering a fall,” he explained.

Furthermore, new business in Saudi Arabia continued to grow sharply over the month, although as was the case for output, the rate of growth slipped from July. This was partly due to a softer increase in export sales, as the resurgence of COVID-19 cases in other parts of the world dampened the recovery in foreign demand.

Saudi Arabian firms continued to report a low level of hiring activity during August. The rate of job creation was unchanged from July and marginal, with companies highlighting that current output capacity was sufficient to complete existing work.

Weak hiring was also linked to a subdued level of business confidence in August. With only 11% of survey respondents expecting output to increase over the forthcoming year, the degree of optimism was among the lowest seen in the series history, despite improving slightly from July.

“Job creation disappointed again in August, due to a further fall in backlog volumes and a subdued outlook for future activity. Whilst firms expect an improvement in domestic business conditions in the coming months, the unpredictability of the pandemic meant that downside risks remained high,” Owen added.

Meanwhile, slower rises in output and new orders led to a softer rate of purchasing growth halfway through the third quarter. Subsequently, stocks of purchases grew at the weakest pace for ten months. Supplier delays were recorded for the first time since March, linked to global raw material shortages and longer wait times for border checks.

On the prices side, latest data signalled the softest rise in input costs for six months, driven by a slowdown in purchase price inflation and a renewed drop in staff expenses. Where costs rose, firms cited higher prices for oil, transport and raw materials such as aluminium.

At the same time, selling prices increased at a solid pace, with inflation accelerating to the quickest seen for a year. Firms indicated that higher input costs, strengthening demand and a mark-up in competitors’ prices encouraged them to raise their charges.

Overall economy rebounds from COVID-19 shock led by non-oil sector

Saudi Arabia’s economy grew by 1.8% year-on-year in the second quarter of 2021, according to official gross domestic product (GDP) estimates.

The General Authority for Statistics, revised upwards earlier estimates of a 1.5% overall growth in the second quarter.

On a quarter-on-quarter basis, the Saudi economy grew 0.6% compared to the first quarter of 2021, with the oil sector fuelling the growth.

The GDP segment comprising wholesale and retail trade, restaurants and hotels, grew 16.9% in Q2 of 2021 compared to the same quarter last year.

Monica Malik, chief economist at Abu Dhabi Commercial Bank explained that the domestic investment programme led by the Public Investment Fund, Saudi Arabia’s main sovereign investor, is expected to be the main driver of economic growth going forward.

Meanwhile, London-based Capital Economics has said the recovery in the non-oil sector has slowed down in recent months, as opposed to the oil sector, which strengthened due to increased output.

Since the launch of the Saudi Vision 2030 by Crown Prince Mohammed bin Salman in 2016, Saudi Arabia’s non-oil revenues have increased more than 200%.

In order to develop and diversify the economy and reduce dependence on oil, Saudi Arabia launched Saudi Vision 2030; built on several economic and financial reforms, which aim to transform the structure of the Saudi economy into a diversified and sustainable economy focused on enhancing productivity, increasing the contribution of the private sector, and empowering the third sector.

Since the launch of the Vision, Saudi Arabia has succeeded in implementing many initiatives and structural reforms to enable economic transformation. This transformation included several major efforts centered around enhancing local content, national industry, launching and developing promising economic sectors, and an enabling dimension aimed at maximizing the role of the private sector and SMEs, and enhancing the sustainability of public finances. These structural shifts have contributed to strengthening the Kingdom’s economy and its ability to combat the Covid-19 pandemic in 2020. It is expected that the pace of this structural transformation will continue in the coming years, in light of a number of investment initiatives under the Public Investment Fund and leading companies.

The Kingdom has witnessed economic and financial structural reforms which promote economic growth while preserving stability and financial sustainability. This is evident in the improvement of the business environment in the Kingdom, and the continuous endeavor to enable the private sector to support economic diversification and overcoming obstacles to make it more attractive to invest in previously untapped sectors.

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