Iran War Drives Saudi Private Sector Activity to Contract for the First Time in 5 Years

SadaNews - Private sector non-oil activity in Saudi Arabia contracted for the first time in over five and a half years due to the war in Iran, which caused supply chain disruptions and delayed spending decisions in March.

The latest reading of the Purchasing Managers' Index, released by Riyad Bank on Sunday, revealed that the index fell to 48.8 points in March, down from 56.1 points in February, dropping below the 50-point mark that separates growth from contraction, marking the second-largest decline since the study began in 2009, following the decline seen in March 2020.

Export Orders Drop and Local Consumer Confidence Declines

New export orders fell at the fastest pace in nearly six years, while local sales were affected by weakened local consumer confidence, prompting companies to reduce their production. The companies surveyed also reported delays in shipping and increased transport costs, contributing to a massive rise in backlogs.

Supply chains in the region are under increasing pressure due to the rerouting of ships, rising insurance costs, and fluctuating shipping schedules, coupled with a decrease in shipping traffic through the Strait of Hormuz, the vital corridor on which Gulf countries rely for importing a large part of essential food and goods.

Analysis of trade data shows that Gulf countries imported nearly $10 billion worth of grains, meats, and fresh products over the past year, most of which arrived by sea through the Strait of Hormuz, highlighting the region's sensitivity to any prolonged disruption in shipping movements.

Jobs Grow, but at a Slower Rate

At the same time, the Purchasing Managers' Index report indicates that the war has led to decreased business activity, with companies reporting halts in new projects while waiting for the outcome of the conflict. It also caused the deliveries to deteriorate at the highest rate since June 2020, due to shipping delays and rising fuel costs, which hindered supply lines.

On their part, companies reduced their purchases of production inputs, but total inventories increased, indicating that the reduction was limited.

Regarding job opportunities, employment expansion continued but slowed significantly compared to February, with some companies indicating an increase in workforce numbers to offset supply pressures and meet local workforce targets.

The Private Sector in the Kingdom Reflects Short-term Uncertainty

Naif Al-Ghaith, Chief Economist at Riyad Bank, stated that the decline in the Purchasing Managers' Index reflects "a temporary correction following a period of strong growth. Although this downturn marks the first drop below expansion levels in more than five and a half years, it largely reflects a short-term uncertainty associated with rising geopolitical tensions in the region."

"Operationally, supply chain challenges added further pressures, with longer delivery times and rising transport costs, but this led to an accumulation of unfinished orders, indicating that underlying demand still exists. Moreover, the fundamental factors remain supportive. Employment expansion continued, indicating business sector confidence in future demand," added Al-Ghaith.

On the other hand, production input costs rose at the slowest pace in a year, due to a slowdown in wage inflation from a record level recorded in February.

Despite the uncertainty, companies remained optimistic about production forecasts, although their expectations sharply declined in March to the lowest level since June 2020. While many companies expressed concerns about the short-term economic impact of the Middle East war, others clung to growth prospects arising from government spending initiatives and infrastructure development and long-term demand improvements.

The Kingdom Moves Logistically

In light of these situations, the Kingdom has accelerated efforts to shield its economy from Iranian strikes, with disruptions in shipping through the Strait of Hormuz, emerging as a major hub for reorganizing oil and trade flows in the region, relying on a multi-route logistics system developed over decades.

As the repercussions of the crisis extend to supply chains, trade, and food in the Gulf, the Kingdom has moved to activate an integrated network including pipelines, ports, land transport, and railways, along with operational solutions in the aviation sector, aiming to maintain fluid flow and mitigate the impact of disruptions.