Saudi Arabia: GDP contracts for first time in nearly two years in Q3 on oil production cuts
December 31, 2019
The economy contracted for the first time since Q4 2017 in the third quarter as oil production cuts in compliance with the OPEC+ deal and a terrorist attack on Saudi oil facilities in mid-September weighed on oil production throughout the quarter. GDP fell 0.5% on an annual basis in the third quarter, contrasting the 0.5% expansion in Q2.
The deterioration was entirely led by a sharp contraction in the oil sector, which fell 6.4% year-on-year in Q3 (Q2: -3.0% year-on-year). Q3’s decline, in fact, represented the sector’s worst performance since Q1 2013 and was the result of a marked decrease in oil production. According to the latest report by OPEC, the Kingdom pumped 9.45 million barrels per day (mbpd) in Q3 2019 compared to 10.42 mbpd in the same period in 2018. Moreover, oil prices averaged lower in Q3 2019 (USD 62.3) compared to the same period in the previous year (USD 74.1), which could have had a negative impact on overall economic growth.
In contrast, the non-oil economy expanded 4.3% in Q3, up from Q2’s 2.9% rise and the fastest increase in five years. The construction sector continued to recover following a dismal performance in the previous years, while retail sector activities surged due to low price pressures and a declining unemployment rate among Saudi nationals. Overall, the non-oil sector benefited from fiscal stimulus and solid private-sector loan growth.
Looking ahead, economic growth should pick up in 2020 as the oil sector recovers from 2019’s poor performance. However, increasing geopolitical risks and an uncertain global economic outlook could led OPEC+ to deepen and/or extend oil production cuts this year, which could weigh on the all-important hydrocarbon sector. Although growth in the non-oil sector should remain robust this year, the large fiscal deficit expected for 2019 could prompt the government to rein in fiscal spending, which would drag on overall economic activity.