UAE Business Activity Rises, but Fear Lurks

10/07/2013 12:00 pm EST


Despite the fact that business activity in the UAE recently reached its highest level in two years, HSBC, one of the largest global financial institutions, is still issuing a warning about inflation, writes Tom Arnold, of The National.

Private-sector business activity in the UAE reached its highest level in more than two years last month, HSBC says.

But the bank warns that inflation is likely to become a growing concern next year, following the release of its latest purchasing managers' index (PMI), a monthly gauge of the performance of the non-oil private sector.

“It's extremely strong reading that shows the UAE economy is continuing to build speed,” said Simon Williams, HSBC's chief economist for the Middle East and North Africa.

“The pickup in job creation is consistent with the positive overall trend, but the rise in wages may mean that price pressures are starting to build. Given rising rents, we fear inflation will be a matter of growing policy concern over 2014.”

The performance of most companies has rebounded strongly since the global financial crisis of 2009, as the economy has grown. That's despite the impact of the current eurozone crisis and recent wobbles in other emerging markets.

But inflation has remained largely in check. Consumer prices edged up 1.3% in August, from the same period last year, according to the National Bureau of Statistics. Still, Dubai's property prices, which have risen by as much as 42% in the past year, have ignited fears about the increasing cost of living.

The seasonally adjusted headline PMI reached a 29-month peak of 56.6 points last month, according to the data. The strong reading is mirrored in Saudi Arabia, a separate survey shows. The kingdom's headline PMI rose to a six-month high of 58.7. A reading above 50 signals a rise in output.

Even so, the kingdom's headline PMI score is lower than a year ago. In the second quarter of this year, Saudi Arabia's GDP grew 2.7% after slumping to its trough—since at least 2010—in the first quarter as oil output fell.

Khatija Haque, a senior economist at Emirates NBD, wrote in a report that, in contrast to Saudi Arabia, “the PMI reading in the UAE has consistently been higher than a year ago, suggesting that the pace of real GDP growth has likely accelerated in 2013.”

Last month, Sultan Al Mansouri, the Economy Minister of the UAE, said the country's GDP would expand by 4.5% this year, the fastest pace since 2008.

The UAE's latest PMI growth was underpinned by the fastest increase in new orders in the survey's 50-month history, bolstered by better market conditions, stronger sales, and new products. New business from abroad also rose sharply during the month, driven in part by increased tourism.

Bigger workloads led companies to step up hiring, lifting employment to the highest level in three months.

But the data also signals rising inflationary pressures for businesses. The rate of cost inflation—the amount that companies pay for stock and other goods and services—climbed to the highest level in seven months.

Although companies have not been passing on the higher cost of goods to customers for many months, because of a backlog of stock and spare capacity in the economy, this trend is weakening. That's as purchase prices rose again last month, albeit at a similar pace to the rise in August.

Staff costs also nudged higher, increasing by their fastest clip since June 2011. Survey respondents cited rising living costs and performance-based pay increases for the salary increases.

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