UAE firms expand as cost pressures bite

UAE non-oil private sector activity strengthened in May, but weaker demand, falling export orders and higher transport and material costs kept growth below its long-term trend, signalling a more cautious phase for businesses exposed to regional trade disruption.

The headline Purchasing Managers’ Index rose to 52.6 in May from 52.1 in April, remaining above the 50 mark that separates expansion from contraction. The improvement showed that business conditions continued to recover from April’s sharp loss of momentum, though the reading stayed below the long-run average of 54.3 and pointed to only moderate growth across the non-oil economy.

Output expanded at the fastest pace in three months as firms worked through existing projects and maintained activity in services, construction, retail and manufacturing. However, the pace of new business growth remained subdued, with companies reporting softer client spending, delayed decisions and caution among customers affected by uncertainty over shipping schedules and regional security risks.

Export orders declined in May, extending pressure on firms that rely on cross-border trade. Companies linked the fall to disruption on key maritime routes, higher freight costs and uncertainty over the duration of the conflict affecting Gulf logistics. The near-closure of the Strait of Hormuz and rerouting of cargo added delays to supply chains, with delivery times deteriorating at the sharpest rate since April 2020.

Cost pressures intensified as businesses faced higher prices for raw materials, shipping, fuel and imported inputs. Several firms raised selling prices to protect margins, though competitive conditions limited the extent to which higher costs could be passed on to customers. That left many companies facing a squeeze between elevated operating expenses and softer demand.

Employment growth slowed to its weakest level since October 2025, suggesting firms were reluctant to add staff while new orders remained fragile. Backlogs of work nevertheless eased, helped by better capacity management and efforts to complete delayed projects. Purchasing activity improved only modestly as companies balanced the need to secure supplies against the risk of holding costly inventories.

Dubai’s non-oil private sector also improved slightly, with its PMI rising to 52.0 in May from 51.6 in April. The reading pointed to continued expansion in the region’s business and tourism hub, but output growth weakened to its slowest pace since June 2021. Firms in Dubai reported softer sales growth, weaker export demand and pressure from higher input costs.

The May figures underline the mixed outlook facing the UAE economy. Domestic activity remains supported by population growth, tourism, government-backed infrastructure, real estate investment and demand for business services. Yet the external trade environment has become more difficult, particularly for companies dependent on imports, re-exports and time-sensitive logistics.

The broader economy entered 2026 with strong momentum after real gross domestic product grew 6.2 per cent in 2025 to Dh1.9 trillion. Non-oil GDP rose 6.8 per cent to Dh1.5 trillion, reflecting expansion across trade, finance, construction, manufacturing and transport. That performance reinforced the country’s diversification strategy, but the latest survey data show that non-oil businesses are not insulated from regional shocks.

Business confidence remained positive in May, with firms still expecting activity to improve over the next 12 months. Optimism was supported by expectations of stronger domestic sales, new projects and eventual stabilisation in supply chains. However, confidence was tempered by concern that shipping disruptions, insurance costs and weaker external demand could persist for longer than anticipated.

Companies are responding by adjusting supplier networks, increasing local sourcing where possible and reviewing pricing strategies. Some firms have also moved to protect delivery schedules by building wider supplier bases and using alternative routes, though such measures can increase costs and reduce margins.