Saudi Arabia: Oil production curbs continue to weigh on economic growth in Q2
The economy logged the weakest growth rate in one-and-a-half years in the second quarter as Saudi Arabia continued to overdeliver on its oil production targets agreed with OPEC+. GDP expanded 0.5% year-on-year in the second quarter, less than one-third of the first quarter’s 1.7% expansion.
Despite the deceleration, Q2’s print masks diverging performances among the main sectors of the economy. The oil sector contracted a sizeable 3.0% year-on-year in Q2 (Q1: +1.0% year-on-year), mostly reflecting a decline in oil production in compliance with the OPEC+ deal. According to the latest report by OPEC, Saudi Arabia pumped 9.8 million barrels per day (mbpd) in Q2 compared to 10.1 mbpd in the same period last year. Moreover, OPEC oil prices averaged lower in Q2 2019 (USD 68.2) than in Q2 2018 (USD 72.0). In contrast, the non-oil economy expanded 2.9% on Q2, up from Q1’s 2.1% rise and the fastest increase in nearly four years. The retail and the construction sectors expanded strongly following dismal performances in the previous years. Overall, the non-oil sector benefited from fiscal stimulus and healthy credit growth.
Looking forward, oil production cuts will continue to undermine economic growth, while low oil prices could force the government to reduce its support to the non-oil sector.
As Giyas Gokkent, MENA chief economist at JPMorgan, points out:
“Barring conflict which disrupts oil production elsewhere, we do not see much scope for a sharp increase in Saudi oil production in the medium term. Meanwhile, Fed’s dovish shift should provide a welcome monetary policy stimulus to nonhydrocarbon activity. […] However, oil prices remain under pressure due to rising US production and weaker global growth. As a result, the fiscal deficit has again widened and we expect the authorities to opt for fiscal restraint in the 2020 budget which could weaken nonhydrocarbon growth. Without higher oil prices and/or deeper reforms, we expect growth to remain in low single digits in the medium term.”