UAE non-oil sector grows steadily, regional tensions weigh on demand -PMI

The UAE's non-oil private sector continued to grow in June, with the S&P Global PMI rising slightly to 53.5, though new orders increased at their slowest pace in nearly four years, falling to 54.5, primarily due to regional tensions impacting demand. Firms mitigated this slowdown by accelerating output to address substantial backlogs, limiting the overall impact on business conditions. Concurrently, Dubai's headline PMI dropped to a near four-year low of 51.8, driven by competitive pressures and weaker tourism, despite a rise in business activity and workforce numbers.

Analysis

The UAE's non-oil private sector demonstrated continued but moderating growth in June, with the S&P Global PMI rising marginally to 53.5. This headline figure, however, obscures a significant underlying weakness, as the new orders subindex declined to 54.5, its lowest reading since September 2021, directly attributed to regional geopolitical tensions dampening client demand. Firms compensated for this demand slowdown by accelerating output to reduce substantial work backlogs, which kept the impact on overall business conditions negligible for the time being. The data presents a mixed picture on the cost front: while input cost inflation eased to the slowest pace in nearly two years, supply chain challenges persisted with delivery times improving at the slowest rate in 14 months. The situation appears more acute in Dubai, where the headline PMI fell to a near four-year low of 51.8, driven by a sharp slowdown in sales growth from competitive pressures and weaker tourism. Despite these headwinds, overall business confidence in the UAE rose to its highest since November, though it remains described as subdued, reflecting the prevailing economic uncertainty.

Key Decisions for Investors

• Investors should monitor the new orders subindex in subsequent PMI releases, as its decline to a near four-year low signals a potential future slowdown once existing backlogs are cleared.
• Consider underweighting exposure to Dubai-centric consumer and tourism-related assets, as the city's specific PMI indicates a sharp deceleration due to competitive pressures and weakening visitor numbers.
• The direct impact of regional geopolitical tensions on client demand warrants a cautious stance; any escalation could further dampen growth, while de-escalation could provide a positive catalyst for a rebound in new orders.
• While top-line growth is decelerating, the slowdown in input cost inflation could protect margins for some non-oil private sector companies, creating potential for selective opportunities.