Egyptian Private Sector Shrinks at Fastest Rate in Over 3 Years

SadaNews - The contraction of the non-oil private sector in Egypt intensified during June, recording the sharpest decline in nearly three and a half years, as companies faced increasing pressures from weak demand and supply chain disruptions caused by tensions in the Middle East.

The Purchasing Managers' Index published by "S&P Global" fell to 46 points in June, down from 47.1 points in May, remaining below the neutral level of fifty that separates growth from contraction for the sixth consecutive month, indicating deteriorating business conditions in the non-oil private sector.

The report showed that new orders declined at the fastest rate since November 2022, while business activity recorded the largest drop since the beginning of 2023, with companies citing customer liquidity problems, raw material shortages, rising prices, and slow supply chains as key factors behind weak sales. External orders were also negatively impacted by the fallout of the conflict in the Middle East on regional trade.

The report noted that about 27% of participating companies reported a decline in sales during June, compared to only 11% indicating an improvement in activity, reflecting the broadening scope of the slowdown across various sectors.

The Regional War Pressures Egyptian Private Sector Activity

Companies attributed a significant part of the decline to the ramifications of the war in the Middle East, which led to shortages of some raw materials, disrupted supply flows, and rising fuel costs. Furthermore, supplier delivery times continued to rise during June, although the pace of increase slowed compared to the previous month, with supply chains affected by shipping disruptions in the Strait of Hormuz.

As a result, companies reduced their purchases, while the number of workers continued to decline, albeit at a slower pace than in May, with most companies attributing the decrease to the natural attrition of the workforce rather than direct layoffs.

Falling Inflation Provides Some Relief to Companies

Despite ongoing inflationary pressures, the survey revealed a noticeable easing in the pace of cost increases compared to the near-record levels recorded in May. The increases in production material prices slowed although companies still pointed to the continued impact of rising fuel and raw material prices linked to regional tensions. Labor costs also recorded the second-fastest increase since January 2018.

David Owen, Chief Economist at "S&P Global Market Intelligence," stated, "The Purchasing Managers' Index fell to 46 in June, which gives greater confidence to the expectations of slowing GDP growth in the second quarter. The historical relationship between the Purchasing Managers' Index and GDP suggests that the recent reading corresponds to a growth rate of 3.8%, significantly lower than the 5% recorded in the second quarter of last year.

He added that the conflict in the Middle East has inflicted "severe damage" on the non-oil private sector, noting the persistent impact of inflation, as companies frequently remarked that rising price pressures have discouraged customer spending, but he also pointed out that the slowdown in inflationary pressures during June provides a degree of relief to companies, with the potential for continued decline if global energy prices fall and regional tensions ease.

Despite the ongoing challenges, companies maintained a relatively positive outlook for the coming months compared to previous months, supported by expectations of reduced conflict-related disruptions and increased government support, although levels of optimism have slightly declined compared to May.