Saudi officials steering efforts to prepare the kingdom for the post-oil era will likely pay little attention to the main reason that caused the economy to shrink in two consecutive quarters for the first time since 2009, reports Bloomberg.
The biggest Arab economy contracted at an annual rate of 1 percent in the second quarter, after shrinking 0.5 percent in the previous three months — not an unexpected outcome at a time when OPEC members are cutting oil production to bolster prices.
More alarming to analysts was the 0.6 percent growth in Saudi Arabia’s non-oil economy, showing the effects of government spending cuts and subdued consumer demand. That rate of expansion is insufficient to offset the impact of lower oil output or to reduce unemployment, according to Ziad Daoud, an economist with Bloomberg Intelligence based in Dubai.
“There has been little momentum in the non-oil sector — its growth rate has been stuck at below 1 percent for a few quarters,” he said. “For an economy that’s trying to diversify away from oil, the performance of the non-oil sector has been too closely linked to oil prices. Breaking this link should be the main priority of Saudi policy makers.”
Crown Prince Mohammed bin Salman is leading the push to transform the economy at a time when crude prices are at about half their 2014 peak, ending more than a decade of prosperity that helped government coffers swell and Saudis enjoy generous handouts. Under his plan, authorities have reduced subsidies and capital spending to control a budget deficit that ballooned to about 15 percent of gross domestic product. They also canceled some financial perks for state employees, but reversed the decision in April.
The latest data showed that businesses and Saudi consumers were still struggling to cope with government policies. Private sector activity grew at an annual rate of 0.4 percent, compared with 0.9 percent in the previous quarter.
“There is very little capital spending going on in Saudi Arabia at the moment,” Mohamad Al Hajj, an equities strategist at the research arm of EFG-Hermes in Dubai, told Bloomberg TV.
The Saudi economy hasn’t contracted for two quarters in a row since at least 2010, official data show. The kingdom doesn’t publish quarterly seasonally-adjusted data, which is used by some economists to define a recession.
Figures released by the government’s statistics agency also show:
- Within non-oil GDP, the government sector expanded almost 1 percent
- The construction industry shrank 1.6 percent after contracting 3 percent in the first quarter
- Manufacturing expanded 1.6 percent after 3 percent growth in the first quarter
- Transport, storage and communication grew 0.8 percent versus 3.5 percent
The kingdom’s Tadawul All Share Index retreated the most in the Middle East, falling 0.7 percent at the close in Riyadh on Sunday.
A Bloomberg survey conducted before Saturday’s release show economists expect growth to grind to a halt this year, compared with a forecast of 0.5 percent in the previous poll.
“What we’re seeing is stagnation in non-oil activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Second-quarter data show still very lackluster demand” even after the government reversed a decision to cut or freeze bonuses and allowances for state employees, she said.