Saudi Arabia’s slowdown extends into Q2 - Capital Economics
Middle East & North Africa Economics

Saudi Arabia’s slowdown extends into Q2

Middle East Economics Update
Written by Virag Forizs

Our GDP Tracker suggests that Saudi Arabia’s economy slowed further at the start of Q2 as the drag from the oil sector intensified and the recent pick-up in the non-oil sector started to peter out. We expect growth to slip further over the rest of this year and our forecasts lie below the consensus.

  • Our GDP Tracker suggests that Saudi Arabia’s economy slowed further at the start of Q2 as the drag from the oil sector intensified and the recent pick-up in the non-oil sector started to peter out. We expect growth to slip further over the rest of this year and our forecasts lie below the consensus.
  • Saudi Arabia’s quarterly GDP data are published with a significant delay – figures for Q1 won’t be released until the end of this month. Our GDP Tracker, which is constructed from monthly activity data, provides a more timely gauge of the Kingdom’s economic performance.
  • Our Tracker suggests that, after slowing over the course of Q1, GDP growth eased further in April. (See Chart 1.) It points to growth of 1.8% y/y in April, down from 3.2% y/y over Q1 as a whole. What’s more, the Tracker has overstated the strength of growth in recent quarters and we suspect that it is doing so again.
  • The slowdown continued to be driven by the oil sector. (See Chart 2.) Oil production stood at 9.8mn bpd in April, down from a peak of 11.0mn bpd in November on the back of OPEC-agreed production cuts. The year-on-year change in output – which is what matters for GDP growth – has weakened sharply.
  • Meanwhile, our Tracker suggests that the pick-up in growth in the non-oil sector since the start of this year has now run its course. (See Chart 2 again.) The latest figures on non-oil imports – a proxy for domestic demand – were disappointing. Imports fell at their fastest pace since August last year in April. (See Chart 3.) And low-level indicators suggest that growth in consumer-facing sectors softened. (See Chart 4.)
  • Looking ahead, we think that the slowdown in Saudi Arabia has further to run. Following the US decision in April not to extend Iranian oil export waivers, all of the talk had been that the oil output cuts agreed by OPEC+ would be partially reversed. But the slump in oil prices in May has resulted in a marked shift in tone and it now looks increasingly likely that the current deal will be rolled over to the end of the year.
  • This means that the drag from the oil sector will intensify. And if we’re right in expecting oil prices to fall to $60pb by end-2019, fiscal policy will become less supportive and weigh on non-oil activity. All told, we remain comfortable with our below-consensus forecast for GDP to grow by just 1.3% this year.

Chart 1: GDP & CE GDP Tracker (% y/y)

Chart 2: CE GDP Trackers (% y/y)

Chart 3: Non-oil Imports

Chart 4: Sum of Point on Sale Transactions and
ATM Cash Withdrawals

 

Sources: CEIC, Refinitiv, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com