Saudi Arabia GDP Q1 2017

Saudi Arabia

Saudi Arabia: Oil cap deal weighs on economic activity in Q1

June 30, 2017

The implementation of the November oil deal to reduce crude output led the Saudi economy to contract for the first time since the global financial crisis in 2009. A tight fiscal stance also restrained growth at the start of the year. GDP fell 0.5% annually in Q1, contrasting Q4’s 2.2% growth.

The oil sector contracted 2.3% annually in Q1 (Q4: +4.6% year-on-year), marking the worst result since Q2 2013. November’s deal among key oil producers led the Kingdom to sharply reduce the oil output. In fact, Saudi Arabia has shouldered the lion's share of the cuts, with the Kingdom pumping 9.89 million barrels per day (mbpd) in Q1, down from 10.54 mbpd in Q4. Activity in the non-oil government sector also declined in Q1 as the government is trying to contain its ballooning fiscal deficit. The construction sector recorded the fifth consecutive drop in output in Q1 as infrastructure investment remains contained mainly due to weak government support. That said, better-than-expected budget figures for Q1 drove authorities to phase out some of the austerity measures adopted last year in April, promising to bolster growth in government activities and also households spending.

Higher crude prices compared to the previous year and lower market interest rates due the government’s reduced borrowing from domestic markets reinvigorated non-oil private activities, which expanded 0.9% annually (Q4: +0.5% yoy), the fastest rate in five quarters. A rebound in wholesale, retail trade, restaurants and hotels activities led the expansion in non-oil activities. A solid expansion in non-oil manufacturing also shored up economic activity in Q1.

FocusEconomics panelists project the economy to grow 0.5% in 2017, which is unchanged from last month’s estimate. For 2018, panelists expect the economy to expand 1.9%.

Author: Ricard Torné, Lead Economist

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