Business conditions in Saudi Arabia marginally improved in February compared to the previous month’s historic low, according to a survey of the country’s non-oil private sector.

The Emirates NBD Purchasing Managers’ Index rose to 53.2, a slight uptick on January’s measure of 53, which was the lowest reading since the survey began in 2009. A reading above 50 indicates growth, while anything below indicates a contraction.

New order growth in the country slowed sharply last month, with a measure of 52.9 marking the lowest level in the survey’s history.
Although current business conditions remain muted, the outlook for future growth prospects improved, reaching its highest point since April 2014.

“While the pace of expansion in Saudi Arabia’s non-oil sector was slow by historical standards in February, firms were much more upbeat about prospects for the coming year, citing new project wins and stronger growth prospects,” said Khatija Haque, head of regional research at Emirates NBD.

The latest reading comes after the introduction of a new value-added tax (VAT) and a range of price hikes at the start of the year in the Kingdom.
Jason Tuvey, Middle East economist at Capital Economics, said these factors contributed to both the increase in inflation and a deterioration in economic conditions, which has eroded households’ consumer spending.

Firms appear to be responding by absorbing some of the impact in their profit margins rather than passing it on to consumers,” he said in a research note.

According to the ENBD PMI survey, firms in Saudi Arabia cut selling prices in February by the most in the survey’s history in response to weakening demand.

While noting that Saudi Arabia’s non-oil sector is likely to improve, Tuvey warned that households will be the “weak spot” for economic recovery. He said an increase in government infrastructure spending will be the main driver for future growth in the non-oil sector.
The survey said that lower PMI readings recorded so far this year were likely in response to the rapid increase in activity and purchasing in the last quarter of 2017, ahead of the introduction of the VAT charge in January.

“We expect this to be a temporary phenomenon and we expect the PMIs to recover over the next couple of months,” the report said.
Elsewhere, the UAE’s PMI dropped for the second month in a row in February to 55.1. It marks the lowest reading since September 2017.
The survey said slower growth in output last month was the main driver behind the drop in the reading. Business optimism about future output also declined last month, falling to 57.2 from 71.2 in January.