Saudi Arabia: Austerity measures weigh on GDP growth in Q1
July 3, 2016
While the rally in oil prices that began in mid-January shored up activity in the oil sector, a sharp fiscal consolidation in an attempt to rein in the Kingdom’s soaring fiscal gap dragged on growth at the outset of the year. GDP expanded 1.5% annually in Q1, which was below the 1.8% rise tallied in Q4. The print marked the weakest expansion in three years.
The strong decline in oil prices observed in 2015 due to ample crude supply in the global markets drove the fiscal deficit to fall to a multi-year low of 15.1% of GDP last year. Against this backdrop, the government slashed public spending and halted some investment projects. This situation prompted government sector activity to contract 2.6% annually in Q1, which followed the sharp 8.5% drop in Q4. While private sector activity held up relatively well in Q4 (Q4: +3.5% year-on-year), fiscal adjustments implemented by the government and higher industry costs led the private sector to expand just 0.2% in Q1. Moreover, activity in the private sector was negatively affected by a base effect stemming from the massive payouts of around USD 30 billion to Saudi citizens that followed the coronation of King Salman bin Abdulaziz in January 2015. Overall, the non-oil sector fell 0.7% in Q1 (Q4: -0.5% yoy) In contrast, strong crude production and high oil prices supported the oil sector, which expanded 5.1% annually in Q1 (Q4: +4.5% yoy).