Saudi Arabia's non-oil economy expands at fastest pace since 2015

The kingdom’s non-oil gross domestic product, which best represents the economic strength of the country, grew an annual 2.9% in the second quarter

People walk in front of graffiti showing Saudi King Salman in Riyadh. The kingdom's 2Q non-oil economy grew at fastest rate since 2015. Ap

Saudi Arabia's non-oil economic growth accelerated at the fastest pace in four years in the second quarter of the year, as the Arab world’s biggest economy shook off the shock impact of an austerity drive that followed the sharp drop in oil prices in 2014 .

The kingdom’s non-oil gross domestic product grew 2.9 per cent year-on-year, higher than 2.1 per cent rate of expansion achieved in the first quarter of 2019, according to the latest data released by the General Authority for Statistics. The pick up in non-oil economic growth was the strongest since the fourth quarter of 2015, when Riyadh started putting fiscal consolidation measures in place to counter a three-year oil price slump that began in the middle of 2014.

The second-quarter increase was driven by private sector activity, which grew 3.4 per cent in the three months to the end of June, up from 1.9 per cent in the first quarter.

“We believe that the more favourable fiscal backdrop and signs of progress in the government’s investment programme have been central to this pick-up in non-oil activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Some of the rise in private sector activity was also likely supported by investments made through the kingdom’s sovereign wealth fund, the Public Investment Fund, which is central to the kingdom’s efforts to transform its economy. Government sector growth was broadly stable in the second quarter of this year, at 1.76 per cent year-on-year from 1.74 per cent in the first three months of the year.

“Private consumption growth remained supported at 4.1 per cent, albeit moderating gradually from 4.8 per cent year-on-year in the first quarter of 2019. The firming in investment activity was also seen in the GDP growth breakdown by sector in areas such as construction and transportation,” ADCB noted.

Saudi Arabia's economy, which relies heavily on the sale of hydrocarbons for revenues, is gradually recovering from the oil price shocks which saw crude prices drop below $30 per barrel in the first quarter of 2016. Prices have since rebounded to $80 per barrel in fourth quarter of last year and are hovering around $60 per barrel currently, strengthening the government's finances.

The kingdom is also pursuing its economic transformation programme under the overarching Vision 2030, which aims to curb subsidies and government spending to generate alternative revenue lines through development of non-oil industrial base.

The Opec+, an alliance of Opec and non-Opec member countries led by Saudi Arabia and Russia, have agreed to implement production cuts until March 2020 in a bid to support prices and balance global oil market. However, Saudi oil output has been below its Opec+ supply agreement of 10.3 million bpd, averaging 9.9 million bpd in the first eight months and 9.8 million bpd in the second quarter of this year.

Saudi Arabia is aiming for 9.8 million bpd of production in October, which is still 5 per cent below of what it is required to cut. It is an indication that it will likely maintain its significant rate of over compliance, Moody's investors Service said in September.

The kingdom's real GDP during the second quarter softened to 0.5 per cent year-on-year after expanding 1.7 per cent in the first quarter of the year. A year-on-year and quarter-on-quarter drop in oil sector GDP, which dropped by 3 per cent during the reported period on the back of lower crude production, affected the headline growth figure.

Economists have argued that growth in non-oil sector best represents the economic strength of the country as oil GDP can skew the headline number due to output cuts.

"The quantity of oil produced is a big factor in Saudi Arabia's GDP [as] this affects the growth. So the right way, the healthy way to look at the Saudi GDP is to look at non-oil private sector, which is growing in the country as domestic consumption is growing," Mazen Al Sudairi, the head of research at Al Rajhi Capital said earlier this week.

In September, the kingdom’s Finance Minister Mohammed Al Jadaan said the non-oil economy is on track to expand 2.9 per cent this year. Al Rajhi’s estimates are in line with government expectations.