Saudi non-oil business activity strengthens on output and new order boost

Economic momentum in the Arab world's largest economy continued in September

Business activity in Saudi Arabia's non-oil private sector economy has improved despite monetary policy challenges. Bloomberg

Saudi Arabia's non-oil economy grew at a quicker pace in September as a sharp increase in output and the number of new orders drove business activity.

The headline Riyad Bank purchasing managers' index reading climbed to 57.2 in September, up from 56.6 in August, rising further above the neutral 50-point mark that separates growth from contraction.

The jump from August’s 11-month low reading underpins a quicker upturn in the health of the kingdom's non-oil private sector, as the headline reading topped its long-run average of 56.9.

“The non-oil economy continues its growth despite the challenges arising from the current monetary policy conditions,” said Naif Al-Ghaith, chief economist at Riyad Bank.

“Our view is that non-oil GDP [gross domestic product] will continue to support growth and remain above 5.5 per cent for 2023, supported by the ongoing reforms under the vision 2030.”

The quickening of the pace of business activity growth at the end of the third quarter was underpinned by a rise in output. More than a quarter of businesses surveyed reported an increase in output levels in September.

Supporting activity growth was another marked increase in new business intakes in September, with the upturn sharpening to the strongest since June.

“Anecdotal evidence signalled that improving market conditions was a key catalyst to rising client orders,” according to the survey.

Saudi Arabia's economy grew by 1.2 per cent in the second quarter of this year, a slightly faster pace of growth than the initial estimates, driven by a sharp expansion in the non-oil sector.

The kingdom’s GDP at current prices reached 970 billion Saudi riyals ($258.66 billion) in the three months to the end of June, according to General Authority for Statistics (Gastat) data.

The non-oil sector grew by 6.1 per cent on an annual basis, beating the authority's initial estimate of a 5.5 per cent expansion in the three-month period to the end of June.

Saudi Arabia’s economy grew by 8.7 per cent last year, the highest annual growth rate among the world's 20 biggest economies, driven by a rise in oil prices and the strong performance of its non-oil private sector.

The kingdom, Opec’s biggest oil producer, has carried its growth momentum forward, albeit at a slower pace.

Earlier this year, Saudi Arabia received the biggest downgrade in economic growth forecast among the G20 economies, according to an International Monetary Fund forecast.

However, non-oil growth in the kingdom is expected to remain close to 5 per cent in 2023, spurred by strong domestic demand despite lower overall growth caused by additional oil production cuts, the IMF said in the September.

Earlier this week, Saudi Arabia revised its growth forecast for 2023 and said it expected to record a budget deficit this year as it boosts spending to achieve its diversification ambitions.

The kingdom expects real GDP to grow by 0.03 per cent this year, “due to a voluntary reduction in oil production”, compared with a previous growth estimate of 3.1 per cent, a preliminary budget statement from the Ministry of Finance showed on Saturday.

Non-oil growth this year is projected to reach 5.9 per cent, led by the trade, hospitality and tourism sectors, it said.

Saudi Arabia is now forecasting a deficit of 82 billion riyals this year, compared with its previous estimate of a surplus of 16 billion riyals.

For this year, the country is projecting revenue of 1.18 trillion riyals and spending of 1.26 trillion riyals.

However, despite forecasts of an overall slower economic growth in the kingdom this year, companies in September were optimistic that improving market conditions and rising sales would continue to support an expansion in business activity.

Meanwhile in Egypt, the non-oil private sector economy continued to soften in September as businesses struggled with supply chain challenges and rapid inflation at the end of the third quarter.

Work backlogs rose to unprecedented levels as output contracted sharply. New orders also fell as rising prices continued to hit client spending and confidence.

The country's headline S&P Global Egypt PMI dropped to 48.7 in September, down from 49.2 in August.

“Egyptian non-oil companies faced unprecedented pressure on their operating capacity in September despite sales continuing to fall, as the PMI Backlogs of Work Index signalled a record pile-up of incomplete orders,” said David Owen, senior economist at S&P Global Market Intelligence.

“Firms were reluctant to draw down inventories as the outlook for supply and prices remains challenging, resulting in output levels dropping sharply and to a greater degree than new orders.”