Saudi Arabia: Recession in 2017, moderate recovery in 2018-2019

In recession

After real GDP growth fell to +1.7% in 2016 from 4.1% in 2015, triggered by markedly lower oil prices, the downturn in the Saudi economy deepened further in H1 2017. Real GDP contracted by -0.5% y/y in Q1 and by -1% y/y in Q2. Supply-side data show that the oil sector shrank by -1.8% y/y in Q2 while the non-oil sector grew by +0.6%. Within the oil sector, oil extraction dropped by -2.5% y/y in Q2, impacted by the November 2016 OPEC agreement to cut oil output, while oil refining rose by +5.8%. Within the non-oil sector, construction (-1.6% y/y) and domestic trade (-0.1%) declined in Q2 while financial and business services (+1.9%), utilities (+1.1%), transport and communication (+0.8%) and agriculture (+0.6%) grew. Early indicators suggest that the downturn continued in Q3. The PMI for the non-oil private sector economy edged up only slightly from an average 55.4 points in Q2 to 55.7 in Q3 – this may appear sound at first sight, but it is well below the long-term average of 58.1 for Saudi Arabia. And private sector credit has contin¬ued to contract in Q3 (-1.4% y/y). All in all, we expect real GDP to contract by -0.3% in 2017 as a whole.