Dubai PMI falls to new low in March

The Dubai PMI fell to a record low of 45.5 in March, signaling a contraction in the non-oil private sector.  This was the first sub-50 reading since February 2016.  New work declined at a record pace in March with more than a third of firms surveyed reporting lower new orders.  Output also fell for the first time in four years but not by as much as new orders.  Unsurprisingly, employment in the private sector declined sharply in March with 14% of firms surveyed reporting lower headcount.  Inventories declined for the second month in a row.  Input costs were largely unchanged, but average selling prices did decline again in March, albeit at the weakest rate in six months.  Business optimism in March was the lowest since Q3 2016.

Lower new work, employment behind March PMI decline

Source: IHS Markit, Emirates NBD Research

The sector surveys show travel and tourism faring particularly badly in March, which was expected given the tightening of travel restrictions around the world.  The headline index for the sector fell to 36.2 from 50.0 in February.  The new work index fell to 24.2 reflecting a much steeper decline in demand than was evident in February.  Output also contracted sharply and this led to significant layoffs or furloughs (employees put on unpaid leave) in the sector. 

Tourism sector fares the worst in March

Source: IHS Markit, Emirates NBD Research

The construction sector also saw a further deterioration in business conditions last month, with the construction index declining to 46.9.  New work fell the most on record, which firms attributed to the impact of the coronavirus.  Output and employment also declined last month.  Firms remain optimistic about their output over the next year, but the degree of optimism was the weakest since August 2016. 

The wholesale and retail sector index rose to four month high of 52.3 in March, bucking the trend seen in most other sectors of the economy.  This was largely to a rise in new work and output as consumers increased purchases of food and essential items before restrictions on people’s movements were imposed.  Despite the sharp rise in output and new work, employment in the wholesale & retail trade sector declined at the fastest rate in five years.  The authorities announced the closure of all non-essential retail businesses in the last week of March, after the survey was conducted, and this is likely to weigh on activity in the sector in the April survey. 

Overall, the PMI data for Dubai in Q1 supports our view that the non-oil sectors in the UAE likely contracted in Q1 2020.  Activity in Q2 is likely to be subdued as well as restrictions of movement and business are likely to stay in place through April in a bid to contain the spread of the coronavirus.  Our base case scenario is for the economy to start recovering in Q3 and gain momentum in the final quarter.  However, with Expo 2020 likely to be delayed by a year, the risks to our -0.5% GDP growth forecast for 2020 remain on the downside.