Palm trees and buildings in Saudi Arabia

Saudi Arabia GDP Q2 2020

Saudi Arabia: GDP contracts deeply in Q2 as both the oil and non-oil sectors reel

The economy contracted 7.0% on an annual basis in the second quarter, after dipping 1.0% in the first quarter. The result marked the fourth consecutive quarter of falling output and the sharpest drop since our records began in Q1 2011 as the non-oil sector felt the brunt of Coivd-19 lockdown measures. Meanwhile, the oil sector continued to decline due to oil production cuts, particularly in May–June.

A sharp drop in non-oil sector output, which fell 8.2% year-on-year in Q2 (Q1 2020: 1.6% yoy), drove the overall downturn. Moreover, the oil sector contracted at a steeper pace of 5.3% in Q2, compared to Q1’s 4.6% fall.

Commenting on the recovery for the Saudi economy, Yarkin Cebeci, an economist at JPMorgan, noted:

“Encouragingly, high frequency data show a sharp recovery in the third quarter of the year. Along with indicators such as point of sales data and industrial production, manufacturing PMI also recovered sharply from the trough seen in 2Q. […] Easing of the COVID-19 related restrictions and the improvement in consumer and business sentiment have been instrumental in this recovery. Also, supportive has been the recovery in oil production.”

Nevertheless, risks are tilted to the downside, as Yarkin Cebeci states:

“The VAT hike introduced in July has hit domestic demand. In fact, this could be the reason behind the stagnation of manufacturing PMI in the last couple of months. Furthermore, government spending will not be a huge help unless there is recovery in oil prices. Finally, depressed oil prices do not create an environment for higher oil production. Hence, we expect the recovery to be persistent but gradual.”

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