Saudi Arabia’s non-oil private sector exhibited a robust improvement in January, with the Purchasing Managers’ Index (PMI) standing at 55.4, indicating economic expansion. However, the Riyad Bank Saudi Arabia PMI report by S&P Global noted a slight decline from December’s 57.5. Despite continued growth in Saudi Arabia’s non-oil sector business activity and new orders, various factors, including slowing demand momentum, heightened competition, and increased cost pressures, contributed to a significant softening of expansion rates since the end of the previous year.
Inflationary pressures
The latest data points to an uptick in inflationary pressures as robust input demand, higher material prices, and growing supply chain risks led to the sharpest increase in purchasing costs since mid-2012. The rise in purchase prices for Saudi Arabia’s non-oil sector was influenced by strong demand and supply chain risks. Notably, higher shipping costs due to the Red Sea crisis played a major role in increasing prices which reached their highest level since May 2012. Combined with a substantial increase in staff costs, this pushed overall input price inflation to its highest level since August 2020. Interestingly, competitive forces compelled companies to absorb these costs rather than passing them on to consumers, possibly as a strategic move to maintain market share in a competitive environment.
Slowing demand
Despite Saudi Arabia’s growing non-oil sector, the headline PMI for January stood at 55.4, down from 57.5 in December, marking its lowest level in exactly two years. While business activity and new orders continued to grow, the overall pace of expansion slowed. Slowing demand also contributed to the moderation of growth rates. Meanwhile, business activity levels expanded at their slowest pace since the beginning of 2022, despite remaining strong overall and widespread across the monitored sectors.
The rate of sales growth eased considerably to a five-month low. Hence, some businesses reported a slowing of demand momentum amid competitive pressures. Additionally, new export work dropped for the fourth time in six months. Increased levels of new business fueled a rise in input demand, leading to sharp growth in purchasing activity and inventory holdings.
Sectoral growth
Despite the challenges, the report noted a slight increase in staffing. Backlogs of work across Saudi Arabia’s non-oil sector rose for the first time since May 2022, indicating that some workloads were not fulfilled. This backlog growth is attributed to a rise in the construction sector in the kingdom, likely associated with ongoing infrastructure projects and real estate development.
Read: Federal Reserve to cut interest rates three times this year
Future outlook
Projections indicate a 2.7 percent growth in the kingdom’s economy for the current year and a substantial 5.5 percent growth by 2025. Last year, an estimated 1.1 percent contraction occurred due to reduced oil output. Despite this, non-oil economic growth has remained robust, propelled by governmental initiatives that open up various sectors for foreign investment. Therefore, Saudi Arabia’s non-oil sector remains resilient amid global economic concerns.
However, firms expressed concerns in the report that persistent inflationary pressures and limited demand growth could impact business expansion in 2024. Consequently, this led to a downturn in business expectations, marking the second-weakest level since mid-2020. Therefore, it is imperative to carefully monitor economic indicators as Saudi Arabia navigates challenges and continues its efforts toward economic diversification.
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