Saudi Arabia’s economy expanded at its slowest rate in three years during the first quarter of this year as low oil prices forced the government to cut spending and raise costs for industry, official data shows.
Some analysts said the data pointed to a risk of the country’s growth slowing to near zero this year, which would be its worst performance since the global financial crisis of 2009.
GDP adjusted for inflation grew by 1.5 per cent from a year earlier between January and March, down from a revised growth rate of 1.8 per cent in the fourth quarter of last year. It was the slowest growth since 0.3 per cent in the first quarter of 2013.
The oil sector expanded by 5.1 per cent in the first quarter of this year as the world’s biggest oil exporter increased its production of crude and exported more refined products.
But the non-oil sector shrank by 0.7 per cent, its worst performance in at least five years. This may be a source of concern to Saudi policymakers because an ambitious reform plan to help the economy cope with an era of cheap oil, announced last month, assumes rapid growth in non-oil businesses.
In December, to curb an annual budget deficit of nearly US$100 billion caused by slumping oil revenue, the government announced cuts in spending and energy subsidies. Officials have said there will be more austerity steps in coming years.
“Austerity will be a multiyear process. There will be more measures in the next few years and these will continue to keep growth subdued,” said Monica Malik, Abu Dhabi Commercial Bank’s chief economist.
In the non-oil part of the economy, the private sector grew by just 0.2 per cent in the first quarter while the government sector shrank by 2.6 per cent.
The non-oil sector’s weakness was partly because the first quarter of last year was unusually strong; in January that year, King Salman awarded public employees two months’ extra salary to mark his accession to the throne.
But the fourth-quarter growth rate for last year of 1.8 per cent was revised down sharply from an original estimate of 3.6 per cent. That points to the possibility of a similar revision for the first-quarter figures.
Ms Malik said ADCB was cutting its Saudi GDP growth forecast for the whole of this year to a drop of 0.1 per cent, from a previous prediction of 0.5 per cent growth.
She said that while private-sector and non-oil activity could pick up slightly from the second quarter of this year, partly because there were signs that the government was paying some of its outstanding bills to private companies, oil output was not continuing to rise significantly year-on-year.
If the economy slows excessively, the government still has the option of spending more to stimulate growth; the central bank holds $573bn of net foreign assets and Riyadh has started borrowing abroad this year to finance some expenditure.
But if it eases up on its austerity programme too much it may increase pressure on the Saudi riyal’s peg against the US dollar, fuelling concern among some foreign investors about the long-term sustainability of its economy.
In a report late last month, London’s Capital Economics said it was expecting growth of between zero and 0.5 per cent this year. “Further ahead, as the fiscal squeeze continues, we think the economy is likely to remain weak for the foreseeable future.”
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