Non-oil private sector activity contracted in Egypt during September, with the Purchasing Managers' Index falling to 47.2 points

Cairo, Egypt (CNN) - Non-oil private sector activity declined in Egypt during September, with the Purchasing Managers’ Index falling to 47.2 points, compared to 49.6 points in August, a reflection of weak demand, high production costs, and continued uncertainty related to regional developments.

The Purchasing Managers' Index expresses the health of the economic situation of the manufacturing and services sector.

The contraction came despite companies continuing to hire and expecting activity to improve in the coming months, reflecting a mixed picture of a sector facing pressure on demand and costs, but still maintaining a degree of confidence in its ability to recover.

"The two largest components"

According to the monthly report of the Standard & Poor's Group, the two largest components of the Purchasing Managers' Index, namely production and new orders, declined sharply and rapidly during September, after many companies resorted to reducing their activity as a result of a lack of customer demand.

The report attributed the decline in demand to declining market conditions, ongoing geopolitical turmoil, and strong inflation pressures.

"a combination of factors"

Professor of International Economics and former Chairman of the Planning and Budget Committee of the House of Representatives, Dr. Fakhri Al-Feki, said that the contraction of non-oil private sector activity is due to a group of factors, foremost of which is the rise in production costs, including energy costs, and the rise in interest rates, in addition to the increase in the cost of imported production inputs. The state of uncertainty resulting from tensions between the United States and Iran represents an additional factor that pushes companies to be more cautious in their production decisions, especially in light of the rising costs and the lack of clarity about the size of expected demand.

Al-Fiqi explained that the rise in production costs pushes companies to rationalize their inputs and production levels, especially in light of the lack of sufficient demand to accommodate the increase in production, as companies find themselves faced with an equation represented by the high cost of production on the one hand, and the decline in demand on the other hand, as inflation leads to the erosion of citizens’ incomes and purchasing power, which prompts consumers to rationalize their consumption, and thus the demand for goods and services slows down, at a time when producers face a rise in operating and production costs, which prompts them to reduce levels of production and purchases to adapt to market conditions.

Companies resorted to reducing their purchases of materials and components, with the volume of purchases declining for the sixth month in a row, while inventories declined for the third month in a row, according to Standard & Poor's. Al-Feki said that companies are working to rationalize their purchases of production supplies, especially with their stocks and the absence of sufficient demand to push them to increase production. He explained that maintaining inventory allows them to respond in the event of a sudden increase in demand, instead of bearing additional production costs in light of the current weak demand.

These developments come at a time when inflationary pressures are still present in the Egyptian economy, as general urban inflation recorded 14.5% on an annual basis in August, compared to 14.9% in July, while core inflation, according to data from the Central Bank of Egypt, reached 14.9% in August compared to 14.7% in July.

Al-Fiqi said in exclusive statements to CNN Arabic that the rise in production costs is ultimately reflected in the prices of goods and services, while inflation leads to the erosion of purchasing power, which prompts consumers to rationalize spending, and in return, producers try to confront the rise in operating costs by reducing production and purchases, which creates a cycle of weak demand and high costs that puts pressure on economic activity.

The impact of the rise in production costs is not limited to manufacturing supplies, as Al-Fiqi pointed out that the rise in energy prices is also reflected in transportation costs, while petroleum product pricing decisions directly affect the cost of transportation and thus in production costs and prices. The decline in purchases of production supplies also reflects a decline in production and supply levels compared to previous periods.

Despite this, non-oil private sector companies continued to hire during September, driven by optimism about future activity and expansions in production capacity with the aim of reducing the backlog of backlogs. According to the report, employment rose for the second month in a row, and this was the first time that the number of employees witnessed successive growth in more than a year.

Al-Fiqi explains the continued employment by saying that companies may reduce production levels without laying off workers, as they prefer to keep trained and qualified workers even if the factory is operating at a lower capacity, so that they are ready to raise production again when demand improves and inflation rates decline. He gave an example of the possibility of operating the factory at 50% of its capacity instead of 70% while keeping the workers, allowing the restoration of high production levels when market conditions improve.

The pressures faced by Egyptian companies do not come in isolation from the global economy, as purchasing managers’ indices have witnessed varying movements among major economies during the recent period, at a time when inflation rates and price pressures are still an influential factor in the decisions of companies and central banks, and in the United States, inflation remains above the target level of the Federal Reserve, which keeps US monetary policy an important factor in the movement of finance and economic activity globally.

The US Federal Reserve raised interest rates in September by 25 percentage points, while continuing to focus on inflation risks, in a global context in which economies are trying to balance reducing inflation and maintaining economic activity, which in turn affects the cost of financing and investment in emerging markets.

Al-Fiqi believes that the tensions between the United States and Iran increase the state of uncertainty for companies and make them more cautious in increasing their production capacity, as they may avoid expansion in light of the high costs and the lack of clarity as to whether there is sufficient demand to accommodate the additional production, especially with the presence of stocks already. He also considers that adapting to the current conditions represents a natural response on the part of companies under these circumstances.

He ruled out that the decline in the Purchasing Managers' Index to 47.2 points necessarily represents a cause for concern, but rather reflects that companies are operating below their production capacity as a result of insufficient demand, which prompts them to reduce production and purchases and adapt to available activity levels.

In the short term, Al-Fiqi expects companies to continue to rationalize their activities, while demand can respond in the medium and long term with a decrease in inflation and an increase in incomes. He pointed out that the general budget began in July and witnessed increases in incomes, including increasing pensions and wages by 15% and raising the minimum wage, but the continuation of inflation remains a factor influencing purchasing power.

"Still holding on"

In a related context, economic expert Walid Gaballah said that the Purchasing Managers’ Index in Egypt declined 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 came in conjunction with the rise in the average global Purchasing Managers’ Index to about 53 points in September, noting that a number of economies witnessed different movements in the index during the same period.

Gaballah added in special statements to CNN Arabic that there are a group of factors that affect the performance of the index in Egypt, including inflationary pressures and regional developments, in addition to the state of uncertainty about the future, which is reflected in the decisions of purchasing managers regarding purchases, inventory and employment, especially since the purchasing managers index is a result and not a cause, explaining that it cannot be considered alone as a decisive indicator of the growth of the Egyptian economy, but rather reflects in part the movement of purchases and activity in companies during a specific period.

He pointed out that the Egyptian economy is still cohesive and enjoys diversity in its sectors, stressing that the continuation of employment reflects the continuation of activity in various sectors, although the pace of employment during the current period is less than expected levels. The state of uncertainty also makes it difficult to determine a clear path for the performance of the private sector during the coming period, in addition to developments in the situation in the region, which will have a role in determining trends in economic activity.

He said that improving regional conditions could support the return of the economy to an upward path, while current developments remain one of the factors that should be followed when assessing the prospects for activity during the coming period, pointing out that continued employment and growth in a number of sectors, especially the services sector, indicates the diversification of the economy and its ability to continue activity, despite the changes shown by the Purchasing Managers’ Index reading during September.