Saudi Arabia: Oil production cuts weigh on economic growth in Q1
Economic growth decelerated sharply in the first quarter as Saudi Arabia took on the lion’s share of the oil production cuts agreed with other key producers. GDP expanded 1.7% year-on-year in the first quarter, more than half that of the fourth quarter’s 3.6% expansion which had represented the strongest expansion in three years.
According to the latest report by OPEC, Saudi Arabia pumped 10.02 million barrels per day (mbpd) in Q1, broadly unchanged from the 9.95 mbpd logged in the same period last year. Against this backdrop, growth in the oil and gas sector moderated from 6.0% in Q4 to 1.0% in Q1. Meanwhile, the non-oil sector slightly improved (Q1: +2.1% year-on-year; Q4: +2.0% yoy) due to stronger dynamics in the private non-oil sector (Q1: +2.3% year-on-year; Q4: +2.0% yoy), which represented the strongest expansion in one-and-a-half years. Growth in the public non-oil sector, however, fell from 2.1% in Q4 to 1.7% in Q1. In terms of GDP by sector, the construction sector posted the first increase since Q4 2015, which may have started to reap the benefits from some of the mega-projects unveiled in recent years such as the futuristic city of Neom. The finance, insurance, real estate and business services sectors also posted impressive gains. Overall, private sector activities benefited from bolder government support and stronger credit growth.
Looking forward, the oil and gas sector will likely contract, weighing on overall growth. Oil production declined markedly in Q2 compared to the same period in 2018 and, with OPEC+ expected to extend the oil production cuts at least until the end of this year, is expected to continue doing so throughout this year. On 30 June, Russia and Saudi Arabia agreed to extend oil curbs by six to nine months in order to shore up oil prices. That said, if the oil production cuts do effectively boost oil prices, this will translate into higher oil revenue and increased government spending.