Saudi Arabia: Economy rebounds in Q1 on improving oil sector
July 1, 2018
The economy expanded for the first time in five quarters in Q1 due to stronger dynamics in the oil sector and a low base from last year. GDP increased 1.2% year-on-year in Q1, contrasting the 1.2% drop in Q4 2017.
Higher oil prices and stable oil output led the hydrocarbon sector to post year-on-year gains in Q1 after falling for four consecutive quarters due to Saudi Arabia’s compliance with OPEC oil production cuts. Oil sector GDP grew 0.6% annually in Q1, contrasting the 4.3% drop in Q4. Growth in the non-oil sector accelerated in Q1 (Q1: +1.6% year-on-year; Q4: +1.3% yoy), even against the implementation of a 5% value-added tax (VAT) in January and a cut in petrol subsidies. Manufacturing activities also sped up markedly in Q1, reflecting strong global growth and public support. While the government did not provide detailed data on manufacturing activity for Q1, manufacture of plastics, chemicals and chemical products likely led the acceleration. The construction sector continued to decline in Q1, but the drop was softer than in Q4. On the flip side, the VAT implementation caused the wholesale, retail trade, restaurants and hotels sector to record the largest decline in over one year. Moreover, higher petrol prices led the transportation sector to contract for the first time since the current series began in 2010.
Looking ahead, the recovery is expected to gain traction due to the much higher prices compared to last year and increased oil supply. Salman bin Abdulaziz Al Saud, the King of Saudi Arabia, agreed on 30 June to increase oil output to offset declining production in Venezuela and any potential shortages due to the implementation of economic sanction against Iran by the U.S. While Saudi officials did not provide any details about the increase, U.S. President Trump said that it could be close to 2 million barrels per day (mbpd), and analysts expect a figure of around 1 mbpd. Tighter financial conditions and a strong currency will limit the recovery. Moreover, increasing political instability in the region and Saudi Arabia’s heavy involvement in the never-ending war in Yemen pose downside risks to growth.