Egypt: PMI Declines Amid Regional Turmoil Pressures.. What Do Experts Say?

Cairo, Egypt - The activity of the non-oil private sector in Egypt declined during September, with the Purchasing Managers' Index (PMI) falling to 47.2 points, compared to 49.6 points in August, reflecting weak demand, rising production costs, and ongoing uncertainty related to regional developments. The PMI reflects the health of the economic situation in the manufacturing and services sectors.

The contraction occurred despite companies continuing to hire and expecting activity to improve in the coming months, reflecting a mixed picture for a sector facing pressures on demand and costs, yet still retaining a degree of confidence in its ability to recover. "The two largest components" According to the monthly report from Standard & Poor's, the two largest components of the PMI, namely production and new orders, sharply and rapidly declined during September, as many companies resorted to reducing their activities due to a lack of customer demand. The report attributed the drop in demand to deteriorating market conditions, ongoing geopolitical disturbances, and strong inflationary pressures. "A range of factors" Dr. Fakhry El-Fekky, an international economics professor and former head of the Planning and Budget Committee in the House of Representatives, stated that the contraction in non-oil private sector activity is due to a range of factors, primarily the rising production costs, including energy costs, high interest rates, along with increased costs of imported production supplies. Additionally, the uncertainty arising from tensions between the United States and Iran represents an extra factor pushing companies to be more cautious in their production decisions, especially amid rising costs and unclear expectations of demand.

Al-Fuqai explained that the rise in production costs drives companies to rationalize their inputs and production levels, especially in light of insufficient demand to absorb increased production. Companies find themselves facing an equation characterized by rising production costs on one hand and declining demand on the other. Inflation leads to the erosion of citizens' incomes and purchasing power, prompting consumers to rationalize their consumption, which in turn slows down demand for goods and services. At the same time, producers are facing rising operating and production costs, which pushes them to reduce production and purchasing levels to adapt to market conditions. Companies have resorted to cutting back on their purchases of materials and components, resulting in a decline in purchasing volume for the sixth consecutive month, while inventories have decreased for the third consecutive month, according to Standard & Poor's. Al-Fuqai noted that companies are working to rationalize their purchases of production inputs, especially with existing inventories and insufficient demand to encourage them to increase production, explaining that maintaining inventory allows them to respond in case of a sudden increase in demand, rather than incurring additional production costs amid the current weak demand.

These developments come at a time when inflationary pressures are still present in the Egyptian economy, where the general inflation rate for urban areas recorded 14.5% year-on-year in August, compared to 14.9% in July. Meanwhile, core inflation, according to data from the Central Bank of Egypt, reached 14.9% in August compared to 14.7% in July. Al-Fuqai stated in exclusive remarks to Afaaq News in Arabic that the rise in production costs ultimately reflects on the prices of goods and services, while inflation leads to the erosion of purchasing power, which drives consumers to rationalize spending. In turn, producers are trying to cope with rising operating costs by reducing production and purchases, creating a cycle of weak demand and rising costs that pressures economic activity.

The impact of rising production costs is not limited to manufacturing supplies, as Al-Fuqai pointed out that the increase in energy prices also reflects on transportation costs, while decisions regarding the pricing of petroleum products directly affect transportation costs and, consequently, production costs and prices. Additionally, the decline in purchases of production supplies reflects a decrease in production and supply levels compared to previous periods. Despite this, private non-oil sector companies continued hiring in September, driven by optimism regarding future activity and expansions in production capacity aimed at reducing the backlog of unfinished work. According to the report, employment rose for the second consecutive month, marking the first time in over a year that the number of employees has seen consecutive growth.

Al-Fuqai explains the continued hiring by stating that companies may reduce production levels without laying off workers, as they prefer to retain trained and qualified labor even if the factory operates at a lower capacity, so they are prepared to ramp up production again when demand improves and inflation rates decrease. He provided an example of operating the factory at 50% of its capacity instead of 70% while keeping the workforce, which allows for the restoration of high production levels when market conditions improve. The pressures facing Egyptian companies do not occur in isolation from the global economy, as purchasing managers' indices have shown varied movements among major economies recently, while inflation rates and price pressures remain influential factors in the decisions of companies and central banks. In the United States, inflation remains above the Federal Reserve's target level, which keeps U.S. monetary policy a significant factor in global financing and economic activity.

The U.S. Federal Reserve raised interest rates in September by 25 basis points, continuing to focus on inflation risks, in a global context where economies are trying to balance between reducing inflation and maintaining economic activity, which in turn affects the cost of financing and investment in emerging markets. Al-Fuqai believes that tensions between the United States and Iran increase uncertainty for companies and make them more cautious about expanding their production capacity, as they may avoid expansion amid rising costs and the unclear demand situation to absorb additional production, especially with existing inventories. He also considers that adapting to the current conditions represents a natural response from companies under these circumstances.

The decline of the Purchasing Managers' Index to 47.2 points is not necessarily a cause for concern; rather, it reflects that companies are operating below their production capacity due to insufficient demand, which drives them to reduce production and purchases and adapt to available activity levels. In the short term, Al-Faqi expects companies to continue rationalizing their activities, while demand may respond in the medium and long term with decreasing inflation and increasing incomes, noting that the public budget began in July and witnessed increases in incomes, including a 15% increase in pensions and wages and raising the minimum wage. However, the continuation of inflation remains a significant factor affecting purchasing power. "It remains resilient." In a related context, economist Walid Gaballah stated that the Purchasing Managers' Index in Egypt fell from 49.6 points in August to 47.2 points in September, a decrease of about 2.4 points, bringing the reading below the stability level of 50 points. He explained that this decline occurred concurrently with a rise in the global average Purchasing Managers' Index to about 53 points in September, indicating that several economies experienced different movements in the index during the same period.

Gaballah added in exclusive statements to Afaq News in Arabic that there are a number of factors affecting the performance of the index in Egypt, including inflationary pressures, regional developments, and the uncertainty regarding the future, which reflects on the purchasing managers' decisions regarding purchases, inventory, and employment. He emphasized that the Purchasing Managers' Index is a result, not a cause, clarifying that it cannot be considered alone as a decisive indicator of the growth of the Egyptian economy; rather, it reflects, in part, the movement of purchases and activity among companies during a specific period. He pointed out that the Egyptian economy remains resilient and enjoys diversity in its sectors, affirming that continued employment reflects the ongoing activity of various sectors, although the pace of employment during the current period is lower than expected levels. Additionally, the state of uncertainty makes it difficult to determine a clear path for the performance of the private sector in the upcoming period, along with developments in the region that will play a role in determining economic activity trends.

He stated that the improvement in regional conditions could support the return of the economy to an upward trajectory, while the ongoing developments remain one of the factors that should be monitored when assessing the outlook for activity in the upcoming period, noting that the continued employment and growth in several sectors, especially the services sector, indicate the diversity of the economy and its ability to maintain activity, despite the changes reflected in the Purchasing Managers' Index reading for September.