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Khatija Haque - Head of Research & Chief Economist
Shady Elborno - Head of Macro Strategy
Published Date: 30 June 2020
Saudi Arabia’s economy contracted -4.5% q/q and -1.0% y/y in Q1 2020. According to official figures, the oil sector contracted -4.6% y/y in Q1, with mining & quarrying down -2.9% y/y. Saudi Arabia’s oil exports declined by about USD11bn y/y in Q1 2020 on lower prices and production as the coronavirus-related shutdowns sapped demand for crude oil. The oil sector likely contracted again in Q2 as deeper production cuts were agreed with OPEC+ from May through July.
The non-oil sectors grew 1.6% y/y in Q1, the slowest rate of growth since Q2 2017. While the Q1 data captures come of the impact of the Covid-19 lockdown on the economy, we expect most of this to be reflected in Q2 GDP figures. Most non-oil sectors posted solid y/y growth in Q1 2020 with trade, restaurants & hotels up 4.8% y/y and transport, storage & communication up 4.1% y/y. These sectors were among the hardest hit in April and May however, as borders were closed and flights grounded. Construction growth slowed to 2.2% y/y in Q1 from 7.7% y/y in Q4 2019.
Survey data show the non-oil private sectors in Saudi Arabia contracting sharply in April as shutdowns and restrictions on movement weighed on business activity and new orders across most sectors. The May PMI readings showed some improvement but were still in contraction territory. The average PMI reading for April – May was 46.3, well below the Q1 average of 49.9. We expect June to be slightly better but anticipate a contraction in non-oil sectors in Q2 2020.
The authorities have also tightened fiscal policy in response to the coronavirus crisis, cutting spending on longer-term projects in favour of boosting spending on healthcare and other near term priorities. Cost of living allowances for public sector workers have been cancelled, and customs duties and VAT will rise from July 2020. This is likely to weigh on domestic consumption and investment even as activity starts to normalise in the coming months. The restriction of the annual Hajj to around 1000 citizens and residents will be a further blow to the hospitality and retail sector in the kingdom this year. We expect GDP this year to contract -4.0%, with much of the bad news likely to be captured in Q2 data.
Source: Haver Analytics, Emirates NBD Research