Business activity in Saudi Arabia remained robust in March on output boost

Business activity in Saudi Arabia’s non-oil private sector economy remained robust in March as output and new business continued to expand, further supporting employment growth in the kingdom at the end of the first quarter.

The reading for the Arab world's largest economy on the Riyad Bank purchasing managers' index hit 58.7 in March, slightly lower than 59.8 recorded in February. Although the index was down from the eight-year high achieved in February, it remained well above the neutral 50 mark that separates growth from contraction.

The reading signalled a marked improvement in operating conditions, and one that was among the strongest seen since early-2015. “Business conditions remain … positive at the end of the first quarter of 2023 as improving market conditions and increased development spending helped to boost demand in the non-oil private sector,” Naif Al-Ghaith, chief economist at Riyad Bank, said.

“Both output and new orders have expanded sharply, adding pressure on capacity at non-oil companies. Therefore, staffing levels have risen across all sectors and the growth in employment was among the strongest seen in the past five years.”

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Saudi Arabia's economy grew by 5.5 per cent on an annual basis in the fourth quarter of last year, driven by a surge in the kingdom's oil and non-oil sectors, according to government estimates.

Non-oil activities for the October-December period jumped 6.2 per cent, oil activities grew 6.1 per cent, while government services activities expanded by 2.9 per cent, the General Authority for Statistics (Gastat) said.

The kingdom's gross domestic product exceeded $1 trillion for the first time in 2022 as its economy grew by 8.7 per cent, according to data released by Gastat last week.

Non-oil activities increased by 5.4 per cent last year, the data showed. The kingdom's preliminary estimates for 2023 indicate GDP growth of 3.1 per cent. The International Monetary Fund expects the Saudi economy to grow by 2.6 per cent this year and by 3.4 per cent next year.

Companies surveyed noted a sharp uplift in new business intakes in March, as improving market conditions and a rise in development spending helped to increase demand.

Some businesses said a “relatively mild increase in output prices” also supported sales growth in March, while orders from foreign customers rose again at the end of the first quarter.

While the rate of overall new order growth softened from February, it was still the second-fastest in a year-and-a-half. A further rise in new business also supported a marked increase in output levels, which was marginally softer than February's recent high.

Input cost inflation faced by non-oil companies rose to a four-month high in March, driven by rising costs for raw materials and staff wages. “On the latter, efforts to compensate workers facing higher living costs meant that salaries rose to the greatest degree since September 2016,” according to the survey.

Businesses polled also remained confident about the prospects of a rise in business activity over the next 12 months. The degree of optimism was unchanged from February and stronger than the trend seen over the past three years.

“Despite the global headwinds including the recent credit crunch and heightened uncertainty, Saudi non-oil firms exhibited a robust degree of confidence towards future activity in March. Supportive government policies along with improving demand levels have been grounds for this optimism,” Mr Al-Ghaith said.

Meanwhile, business conditions in Egypt's non-oil private sector economy continued to weaken, with the S&P Global Egypt PMI falling to 46.7 in March, down from 46.9 in February. Activity and new orders continued to contract last month as inflation and supply constraints drove sustained demand weakness.

The exchange rate volatility also added to sharp increases in costs and charges, while the outlook for future output remained among the weakest on record.

“The Egypt PMI continued to signal multiple headwinds on the private sector economy in March, rounding off a bleak first quarter of 2023, as demand remained crippled by high inflation, a weakening currency and import controls,” David Owen, senior economist at S&P Global Market Intelligence, said.

“The sharp rise in inflation to 31.9 per cent in February — the highest in five-and-a-half years — illustrates the daunting cost-of-living crisis affecting the country at present, in large part due to a marked drop in the value of the Egyptian pound over recent months.”