In a significant economic development, Egypt’s non-oil private sector expanded in January 2025, marking its first growth since August and achieving its best performance in over four years. This positive trend is highlighted by S&P Global’s Purchasing Managers’ Index (PMI), which rose to 50.7 in January from 48.1 in December. A PMI reading above 50.0 indicates growth, while a figure below that threshold points to contraction.

Key Drivers of Growth

The expansion in January was primarily driven by improved domestic market conditions and a softening of cost pressures. These factors contributed to increases in both output and sales volumes. The output sub-index climbed to 51.1 from 47.1 in December, while the new orders index rose to 51.3 from 46.4. This indicates that businesses experienced a notable uptick in demand and production activities at the start of the year.

Impact of Regional Developments

Analysts suggest that the recent ceasefire agreement between Israel and Hamas played a role in bolstering market confidence in January. David Owen, Senior Economist at S&P Global Market Intelligence, noted, “The ceasefire deal between Israel and Hamas likely added confidence to markets in January.” However, he also cautioned that firms remain uncertain about long-term economic stability, which has affected business expectations and hiring decisions.

Employment and Business Expectations

Despite the positive indicators, firms exhibited caution regarding future activities. Employment levels stabilized after two consecutive months of job cuts, but hiring remained limited. The sub-index for expected future output fell to 52.8 from 53.8 in December, reflecting subdued business expectations for the next 12 months. This suggests that while current conditions have improved, companies are wary about the sustainability of this upturn.

Easing Cost Pressures

One of the notable aspects of January’s performance was the easing of cost pressures. Input prices rose at a slower pace, reaching an eight-month low. This allowed firms to implement only slight increases in output prices, marking the softest rise in four-and-a-half years. The construction sector, in particular, benefited from a decrease in purchase costs, while other sectors experienced slower inflation compared to December.

Historical Context and Recent Trends

To understand the significance of January’s performance, it’s essential to consider the historical context. Egypt’s non-oil private sector has faced numerous challenges in recent years, including political instability, currency fluctuations, and external economic shocks. These factors have often led to contractions in the sector, as evidenced by PMI readings below the 50.0 threshold.

For instance, in November 2024, the PMI edged up to 49.2 from 49.0 in October, indicating a marginal downturn in business conditions. Despite the slight improvement, the index still pointed to a decline in the sector’s health. Similarly, in December 2024, operating conditions deteriorated further, with output and new orders falling at the sharpest rates in eight months amid rising cost pressures.

Given this backdrop, the January 2025 PMI reading of 50.7 represents a notable turnaround, signaling a renewed improvement in the sector’s health at the start of the year.

Broader Economic Outlook

Looking ahead, analysts have mixed views on Egypt’s economic prospects. A Reuters poll conducted in July 2024 predicted that Egypt’s economy would grow by 4.0% in the fiscal year ending June 2025, driven by reforms implemented under an $8 billion International Monetary Fund (IMF) package and a $24 billion investment from the United Arab Emirates. This growth is expected to accelerate to 4.7% in 2025/26 and 5.0% in 2026/27.

However, challenges remain. The country has been grappling with high inflation, which peaked at nearly 40% in September 2023. While inflation is expected to decline to around 20.4% in 2024/25, it remains a concern for both businesses and consumers. Additionally, the Egyptian pound has experienced significant depreciation against the U.S. dollar, trading around 50.4 per dollar by mid-2025. This depreciation has implications for import costs and overall economic stability.

IMF Engagement and Economic Reforms

The Egyptian government has been actively engaging with international financial institutions to address its economic challenges. In March 2024, Egypt reached a staff-level agreement with the IMF on the first and second reviews under the Extended Fund Facility (EFF) arrangement. This agreement underscores the country’s commitment to implementing economic reforms aimed at achieving sustainable growth and macroeconomic stability.

The IMF has emphasized the importance of building economic buffers to withstand external shocks. Jihad Azour, the IMF’s regional official, stated in October 2024 that while economic conditions in Egypt are improving, it is crucial to continue implementing reforms to ensure long-term stability. He highlighted progress toward growth recovery, reduced inflation, and a stable foreign exchange market as positive indicators.

Sectoral Performance and Future Prospects

The performance of various sectors within the non-oil private sector has been mixed. The construction sector, for example, saw a decrease in purchase costs in January, which could signal a potential revival in construction activities. Other sectors experienced slower inflation than in December, suggesting a broad-based easing of cost pressures.

Despite these positive developments, firms remain cautious about future activity. The decline in the sub-index for expected future output indicates that businesses are uncertain about the sustainability of the current upturn. This caution is reflected in limited hiring and conservative investment plans.

Conclusion

In summary, Egypt’s non-oil private sector exhibited signs of recovery in January 2025, with the PMI rising above the critical 50.0 threshold for the first time since August. Improved domestic market conditions, easing cost pressures, and regional developments contributed to this positive performance. However, firms remain cautious about the future, with subdued business expectations and limited hiring. While the recent data provides a glimmer of hope, sustained economic growth will depend on the successful implementation of reforms, effective management of inflation, and the stabilization of the currency. The government’s engagement with international financial institutions, such as the IMF, will play a crucial role in navigating the challenges ahead and ensuring long-term economic stability.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

4th January, 2025