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Saudi Arabia GDP Q2 2018

Saudi Arabia: Economic growth accelerates in Q2 on higher oil exports

The Saudi economy continued to recover in the second quarter on the back of higher oil prices and increased oil production. GDP expanded 1.6% year-on-year in Q2, following the 1.2% rise in the first quarter and marking the best result since Q4 2016.

Oil prices continued to climb in Q2 due to solid global demand and supply concerns due to political instability in the Middle East and North Africa and supply shortages in Angola, Nigeria and, especially, Venezuela. As a result, oil prices in Q2 were up 50% compared to the same period in 2017, which propelled activity in the oil sector. Moreover, Saudi Arabia ramped up production at the end of Q2 to keep global oil markets adequately supplied in the face of aforementioned supply concerns. The oil sector GDP thus accelerated to 1.3% year-on-year in Q2, following the 0.6% increase in Q1. Increased oil revenues fostered activity in the public non-oil sector, which expanded 4.0% in Q2 (Q1: +2.7% year-on-year)—the strongest increase in over three years. However, despite accelerating (Q2: +1.8% yoy; Q1: +1.1% yoy), growth in the non-oil private sector remained relatively weak as the economy recovers from the implementation of a value added tax and subsidy cuts in January. Saudization, the government’s initiative to reduce unemployment among native Saudis, has prompted an exodus of foreign workers this year, likely impacting the performance of the private sector, especially that of retailers.

From the expenditure point of view, economic growth was fueled by strong government spending, which soared 7.5% in Q2 (Q1: +1.6% yoy), while private consumption grew a more modest 2.5% (Q1: +2.0% yoy). Stronger state revenues led gross fixed capital formation to rebound strongly to a 5.2% increase in Q2 (Q1: -3.4% yoy). Exports of goods and services benefited from higher oil prices and expanded 7.0% in Q2 (Q1: -0.4% yoy). Conversely, a relatively weak domestic economy led imports to decrease 6.5% (Q1: -3.7% yoy).

Looking ahead, economic growth is expected to accelerate due to higher oil prices compared to last year and stronger oil production. Moreover, the recovery in the oil sector is allowing the government to unwind some of the austerity measures implemented in the wake of the oil price plunge in 2014–2017 and adopt more pro-growth initiatives. Against this backdrop, the recovery should broaden in the coming months and feed through to the non-oil sector. That said, downside risks remain large in the Kingdom. Geopolitical issues continue to heighten economic uncertainty, especially tensions between Iran and the United States and the ongoing diplomatic spat between Qatar and Saudi Arabia’s over the Yemeni civil war. Furthermore, higher interest rates due to the tightening cycle in the United States could harm domestic economic growth, while the decision in August to postpone Aramco’s initial public offering suggests that the Saudi government may have taken their feet off the pedal amid solid oil revenues, fueling concerns about Saudi Arabia’s commitment to economic reforms.

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