The UAE’s non-oil sector demonstrated strong momentum at the close of 2025, but increasing economic pressures are becoming a key concern. A recent survey reveals more than a quarter of companies reported output growth in December, one of the fastest rates of the year, fueled by robust demand. However, this expansion coincided with a sharp rise in input costs, squeezing profit margins and prompting a cautious approach to inventory management.
UAE Non-Oil Sector Shows Resilience Amid Rising Input Costs
Activity levels remained surprisingly strong during the final month of the year. The expansion was driven by several factors, including increased new orders, a growing customer base, a surge in tourism, and improvements in international business. Despite these positive indicators, conditions are becoming more challenging for businesses operating within the country.
A significant factor impacting businesses is the rapidly increasing price of inputs. The report indicates that input costs rose at their fastest pace in 15 months, with salary expenses, transportation costs, and maintenance all contributing to the surge. While many companies attempted to pass these costs onto consumers through price increases, the adjustments were generally modest, leading to reduced profit margins.
Inventory Management a Key Concern
Companies are actively managing their inventory levels in response to rising costs and economic uncertainty. Despite an increase in purchasing activity, inventories fell at one of the steepest rates on record. Businesses appear to be prioritizing a cautious approach, preferring to utilize newly acquired materials for current orders rather than build up substantial stockpiles.
Slowing Hiring and Increasing Backlogs
Employment growth within the non-oil sector slowed considerably in December, with only a marginal increase in staff additions. This slower pace of hiring, coupled with increased demand and reported administrative delays, led to a noticeable build-up of work backlogs. The current backlog is the most significant in ten months, suggesting potential strain on operational capacity.
David Owen, Senior Economist at S&P Global Market Intelligence, noted the contrasting signals at the end of the year. He stated the UAE non-oil sector concluded 2025 with a solid upturn, although the overall year reflected tempered growth compared to previous years. The average Purchasing Managers’ Index (PMI) for the year was 54.0, slightly below its long-run average and marking the weakest annual performance since 2021.
Businesses continue to benefit from strong consumer spending, including contributions from tourism, increased technology adoption, and supportive government policies. However, the acceleration of cost pressures and the lean inventory strategies adopted by many firms indicate growing financial constraints. These factors are likely to influence business strategies in the coming months.
Dubai Leads the Way with Strong Output Growth
Dubai’s non-oil economy exhibited particularly strong performance in December, ending the year on a positive note. The emirate’s PMI reached 54.3, only slightly below the preceding months, signifying continued improvement in operating conditions. Output growth in Dubai was the strongest it has been since March 2024, driven by increased new business, even with a slight slowdown in sales momentum compared to November.
Dubai-based firms successfully increased output despite a modest rise in employment and a further reduction in input stocks. The survey confirmed the sharpest decrease in inventories since April 2020, aligning with the national trend toward cautious inventory management. Higher input price pressures prompted a faster, yet still restrained, increase in output prices as businesses reacted to the increased financial burden. Economic outlook for Dubai remains closely tied to its tourism sector.
Looking ahead to 2026, business expectations across the UAE non-oil sector remain generally optimistic, but have softened considerably. Survey respondents acknowledged potential for growth driven by demand and investment but also expressed concerns over market saturation and heightened competition. The need for increased productivity, strategic expansion, and disciplined cost control is becoming increasingly clear as the economic cycle evolves. Monitoring inflation rates will be crucial.
The coming months will likely see continued pressure on operating margins as businesses navigate rising costs and strive to maintain competitiveness. Government policies aimed at fostering sustainable growth and mitigating inflationary pressures will be critical. Further data releases regarding growth in the services and construction sectors will offer a more comprehensive picture of the UAE’s economic trajectory in early 2026. Key factors to watch include global commodity prices and the overall health of the global economy.
