(MENAFN - Khaleej Times) Non-oil sector growth in the UAE got off to a strong start in January amid improving economic conditions marked by faster rise in activity and sharp increase in orders, a survey shows.

An Emirates NBD survey produced by IHS Markit said better economic conditions resulted in further gains in output and new orders at non-oil companies regardless of a slight decline in the headline index in January.

"Employment growth was at the strongest pace for a year on the back of increased workloads," the survey said.

However, the introduction of VAT in January added to companies' input costs, which rose at the fastest pace in 74 months. "Anecdotal evidence suggested that stock-building in advance of VAT coming into force was responsible for a marked slowdown in the rates of expansion in both purchasing activity and stocks of inputs," Emirates NBD survey said.

Panellists predicted that activity will increase once the new VAT system becomes more familiar, with higher new orders also expected to support output growth.

Khatija Haque, head of Mena research at Emirates NBD, said the January survey indicates that non-oil sector growth got off to a strong start in 2018, notwithstanding the slight decline in the headline index.

"The impact of VAT is evident in the sharp rise in input costs last month. While selling prices also increased in January, the survey suggests that the full rise in input costs was not passed on to consumers," said Haque.

January witnessed faster rise in activity amid sharp increase in new orders while introduction of VAT led to steepest rise in input costs since November 2011 as purchasing activity expanded at a much weaker pace as firms made use of warehouse stocks, the report said.

The headline seasonally adjusted Emirates NBD UAE Purchasing Managers' Index (PMI) - a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy - posted 56.8 in January, down from 57.7 in December but still signalling a marked monthly improvement in business conditions.

Most UAE companies witnessed sharp increase in new orders during January, linked to stronger economic conditions, competitive pricing and the securing of new clients. New export orders also rose, the second month running in which that has been the case.

"Higher new orders contributed to a sharp and accelerated rise in business activity. Despite the faster rise in output, backlogs of work continued to accumulate," said the report.

In line with higher workloads at the start of the year, private sector firms increased their employment. Although modest, the rate of job creation was the fastest since January 2017.

The report noted that the introduction of VAT impacted on pricing and purchasing during January. "Overall input costs rose at a much faster pace than in December, with companies often linking higher purchase prices to the impact of the new VAT. Purchase costs increased at the sharpest rate since November 2011, while wages and salaries also rose at a faster pace."

Output charges increased for the first time in five months, with panellists suggesting that this was due to the inclusion of VAT in selling prices, the bank said.

"Rates of expansion in both input buying and stocks of purchases were much slower at the start of the year. Respondents indicated that stock-building in advance of the VAT introduction meant that inventories were sufficient to deal with current workloads," the report said.

Banks in the UAE are upbeat about 2018 with faster economic growth and higher interest rates set to boost earnings. Economists expect that the recovery in oil prices would allow the government to restart delayed projects and may persuade companies to increase investments.

Growth of GDP is expected to accelerate to 3.9 per cent in 2018, Abdullah Al Saleh, Undersecretary for Foreign Trade of the Ministry of Economy, has said, citing a forecast by the Central Bank. The International Monetary Fund projected the UAE economy would grow 3.4 per cent in 2018.

In sum, there was a marked improvement in business confidence in January. Sentiment was the strongest since June 2015, said the Emirates NBD report.

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Issac John Associate Business Editor of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.

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