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Middle East Economy
Saudi private sector growth slows sharply
From the Financial Times of Tue, 04 Nov 2014 14:48:23 GMT
Saudi men chat outside the Saudi Stock Exchange or Tadawul in Riyadh on December 5, 2009. Saudi stocks closed down one percent as investors shrugged off neighbouring Dubai's debt crisis in the first trading day on the Riyadh market in nearly two weeks. AFP PHOTO/STR (Photo credit should read -/AFP/Getty Images)©AFP

Growth in Saudi Arabia’s private sector economy is slowing as lower oil prices and labour market reforms dampen sentiment, new data shows.

The Saudi British Bank HSBC Saudi Arabia purchasing managers’ index revealed continued economic growth in the Arab world’s largest economy, recording a value of 59.1 for October, but it had slowed down sharply since September’s 39-month peak of 61.8.

The PMI index tracks private sector non-oil companies by monitoring output, orders, prices and employment. An overall level above 50 indicates expansion, below 50 shows contraction.

“One reason for this (weaker activity) may be that the slide in oil prices has weighed on sentiment,” Jason Tuvey of Capital Economics said in a research note on Tuesday. “But there are also signs that recent labour market policies are pushing up wage costs.”

HSBC noted that output and new orders were growing at “much slower rates”.

“There were reports that demand was rising to a lesser extent than seen in previous months, both at home and abroad,” HSBC wrote in the monthly PMI report.

The slowdown comes as concerns grow about the domestic impact of lower oil prices hitting government finances as labour market reforms increase wage pressure.

SABB HSBC Saudi Arabia PMI

Oil prices fell sharply after Saudi Arabia cut crude prices for US customers, with West Texas Intermediate falling to a three-year low of $77.20 a barrel in early Tuesday trade.

The kingdom seems committed to protecting its market share against rising shale production in the US despite the oil price decline lowering revenues.

Riyadh has introduced a series of reforms introducing incentives and penalties to boost the employment of Saudi nationals in the private sector. October’s PMI report indicated the strongest private-sector employment growth since September 2012.

The reforms, seen as vital for dealing with long-term unemployment, have been accompanied by crackdowns on illegal workers, increasing wage inflation.

Official data in September confirmed that gross domestic product growth eased to an annual 3.8 per cent in the second quarter – its lowest rate in a year – on a slowdown in the oil sector. The GDP decline from the first to the second quarter was the biggest fall since quarterly data began to be compiled in 2010.

John Sfakianakis of emerging markets-focused investment managers Ashmore Group said moderation in the economy reflected the broader easing in sectors such as construction, transport and retail, slowing government spending and lower demand.

“The PMI numbers are showing what Q2 GDP numbers are showing: basically the economy is slowing down,” said Mr Sfakianakis. “Not significantly – but it’s slowing down compared to last year.”

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