Business activity in Egypt shrank in July, a survey showed on Tuesday, in a sign the economy remains fragile after cuts to energy subsidies last month led to lower demand and higher prices.
Egypt’s economy has been hit by more than three years of political and economic turmoil following the 2011 uprising that toppled Hosni Mubarak after 30 years in power.
The government is walking a fine line in an attempt to boost revenues and cut its deficit while luring investors.
The HSBC Egypt Purchasing Managers Index (PMI) for the non-oil private sector stood at 49.0 points in July, down from a six-month high of 51.5 points in June. Readings above 50 indicate expansion, while those below 50 point to contraction.
“It’s a disappointing reading, underscoring the scale of the challenge policymakers face as they try to bring the Egyptian economy back to life,” said Simon Williams, Chief Economist for the Middle East at HSBC.
“The July numbers may also capture the first effects of last month’s subsidy cuts which seem to have not just lifted prices but hit demand, too.”
Egypt raised fuel prices by up to 78 percent last month in a long-awaited step to cut energy subsidies and ease the burden on the government’s swelling budget deficit.
Successive governments, fearing a backlash from a public used to cheap goods, had backed away from curbing food and energy subsidies which usually account for up to a quarter of state spending.
Egypt’s budget for the fiscal year that began on July 1 seeks to use 40 billion Egyptian pounds in savings from subsidy reform to reduce the deficit to 10 percent of gross domestic product from an expected shortfall of 12 percent in the 2013/14 fiscal year.
The government expects the economy to grow by more than 3 percent in the year to the end of next June, from an expected 2 percent for this fiscal year.
Egypt is targeting economic growth of up to 5.8 percent in the next three years with the deficit staying at around 10 percent.
The PMI survey of around 350 private-sector firms showed that output resumed its steady contraction after a month of growth in June, with the related subindex down at 48.7 points in July from 52.3 points the month before.
The subindex for new orders dropped to 48.5 points from 52.3 points in June. New export orders declined to 49.1 points compared with June’s 51.9 points.
Employment stabilised in July, indicating a halting of the decline in employment observed at Egypt non-oil private sector firms since May 2012.
Output prices rose, with that subindex at 50.5 points, up from 49.5 points in June. Input prices rose sharply, with the index at 67.8 points, squeezing company margins faster than in June when it stood at 59.3 points.