The IMF slashed its forecast for growth in Saudi Arabia, as it blamed the slowing Chinese economy, the collapse in oil prices and a slowdown in emerging markets for a cut to the overall economic outlook for the world.
Saudi Arabia’s economy will grow at just 1.2 per cent in 2016, and 1.9 per cent the year after, the fund expects.
Both figures are one percentage point below the IMF’s October forecasts for growth in the kingdom.
Saudi Arabia announced an austerity budget in December that should result in spending falling by 13 per cent this year. Government spending accounts for about a third of GDP.
Corporate profitability in Saudi Arabia remains highly dependent on government spending, the IMF says.
Calling the growth downgrade “a substantial cut”, William Jackson, senior emerging markets economist at Capital Economics, said: “It’s a late recognition of some of the realities facing Saudi Arabia.”
Government spending cuts are likely to be the main factor slowing growth in the Saudi economy, Mr Jackson said.
“But it was clear even before [the government’s] spending plans were outlined that spending would be cut, and that would hit the non-oil sector.”
Progress on diversifying the economy from dependence on the government has been poor, Mr Jackson said, which heightens the kingdom’s vulnerability to the collapse in oil prices.
“Despite the perceived growth of the private sector, it’s still very dependent on government spending and government contracts,” he said. “There’s still a very close relationship between the two. Some of the drivers of growth in the private sector you’d like to see, like productivity growth, have been pretty woeful.”
The IMF has also cut its outlook for global growth. The world’s economy will grow by 3.4 per cent this year, 0.2 percentage points below October’s projection of 3.6 per cent. The world is considered to be in recession when growth dips below 3 per cent per year. It is expected to pick up to 3.6 per cent next year.
China yesterday announced that it grew in 2015 at its slowest pace since 1990, in a further blow to the global growth outlook. The country said that it grew at 6.9 per cent last year.
Official Chinese statistics have been criticised by analysts around the world, with many convinced that Chinese growth is significantly slower than the government will admit.
China has served as the motor of the global economy since the 2008 financial crash, which left much of the world reeling.
Two stock market routs in Shanghai, followed by heavy-handed regulatory moves to shore up equities, have left investors worried that the Chinese government will be unable to transition from an investment-led to a consumer-led economy without major negative repercussions.
“For 2016 and 2017 we are downgrading growth estimates … across the board,” said Maury Obstfeld, director of the IMF’s research department.
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