Saudi non-oil private sector adds jobs despite easing output growth

Saudi Arabia's non-oil private sector maintained robust expansion in July, with the PMI at 56.3, though decelerating from June's 57.2. Growth was underpinned by strong domestic demand and a significant surge in job creation, marking a historically steep rise in employment. However, output growth slowed to its lowest since January 2022 due to increased competition and the first decline in new export orders in nine months. While input cost pressures softened, rising labor costs and a softening in overall business optimism (lowest since July 2024) suggest emerging headwinds despite continued domestic strength.

Analysis

Saudi Arabia's non-oil private sector demonstrated continued but decelerating growth in July, with the Riyad Bank PMI falling to 56.3 from 57.2 in June. While the reading remains firmly in expansionary territory, the data presents a bifurcated picture. The domestic economy appears robust, driving a historically steep rise in employment as firms hired to manage strong client demand and higher workloads. However, significant headwinds are emerging. Output growth slowed to its lowest rate since January 2022, attributed to increased competition and lower customer footfall. More critically, the external-facing economy showed weakness, with new export orders declining for the first time in nine months. On the cost front, while input price inflation has softened from its second-quarter average, labor costs continued to rise steeply, reflecting a tight labor market where companies use bonuses for retention. This combination of slowing output, weakening external demand, and rising labor costs has tempered future expectations, with business optimism falling to the lowest level recorded since July 2024.

Key Decisions for Investors

• Investors should recognize that while Saudi Arabia's non-oil economy remains strong, the decelerating PMI and falling export orders suggest the pace of growth is moderating, warranting a more cautious stance on future expansion.
• The divergence between resilient domestic demand and weakening exports indicates that investment exposure should favor companies focused on the internal Saudi market over those reliant on international sales.
• Monitor corporate margins closely, as the steep rise in labor costs could compress profitability even as broader input price pressures ease, posing a risk to earnings for Saudi-domiciled firms.
• The decline in business optimism, despite still-strong activity, serves as a potential leading indicator of a further slowdown and should be factored into risk assessments for Saudi-exposed assets.