Saudi Arabia: Economy returns to recession in Q2 as oil cuts continue to weigh on activity
September 30, 2017
The economy slipped into recession in the second quarter as the oil sector struggled with low crude output and prices, and the non-oil economy grappled with economic reforms and the government’s tight fiscal stance. In year-on-year terms, Saudi GDP shrank 1.0% in Q2, which marked a deterioration from the 0.5% decrease recorded in the previous quarter.
The hydrocarbon sector performed poorly in Q2 as the country remained firmly committed to the OPEC-dictated cuts enacted last November. The oil sector contracted 1.8% annually in Q2 (Q1: -2.3% year-on-year). The more moderate decline reflected slightly higher crude output (Q2: 9.95 mbpd; Q1: 9.88 mbpd), which offset somewhat lower oil prices than in the first quarter. Although the OPEC agreement is currently set to expire next March, OPEC members have repeatedly hinted that output cuts could be extended further, which would continue weighing on Saudi Arabia’s oil economy.
The non-oil sector’s performance was slightly more resilient but showcased businesses’ difficulties as a result of the government’s reform agenda. Authorities are attempting to reduce the economy’s reliance on oil; these efforts are weighing on domestic demand as new taxes are introduced and credit to firms remains subdued. As a result, the non-oil economy expanded at a meagre 0.6% in annual terms in Q2, mirroring Q1’s figure. Q2 growth in the non-oil private sector slowed to 0.4% (Q1: +0.9% yoy), while the non-crude public sector grew 1.0%, following a 0.1% contraction in Q1.
In light of persistent weakness in the oil sector, the government has announced plans to approve a stimulus package in the fourth quarter in a bid to rekindle the non-oil economy. However, the effects of any stimulus measures are expected to be offset by planned steps to limit government spending and increase revenue sources. Adding to the duties on tobacco products and soft drinks already imposed in July, an energy price reform is expected to come into force next year, while a VAT tax will be implemented in January 2018. This is expected to keep domestic demand subdued as higher taxes dent households’ purchasing power.
Author: David Ampudia, Economist