Saudi Arabia, the world’s leading crude exporter, has experienced its most significant economic contraction since 2020 during the third quarter of 2023. This downturn was primarily induced by the deliberate reduction in oil production aimed at bolstering oil prices.
Preliminary data from the General Authority of Statistics reveals that the Gross Domestic Product (GDP) of Saudi Arabia contracted by 4.5% in the third quarter compared to the same period in the previous year. Notably, this contraction was primarily driven by a remarkable 17% reduction in the oil sector. Furthermore, growth in the non-oil economy has also decelerated.
This economic contraction marks the most substantial downturn in three years, a period when the global economy was grappling with the far-reaching consequences of the coronavirus pandemic. It is the first instance of economic contraction since the outset of 2021.
In a unilateral move, Saudi Arabia curtailed its oil production in July, effectively reducing its daily output to 9 million barrels. Currently, the kingdom is producing nearly 1 million barrels per day below its ten-year average, and it is likely to maintain this reduced output until at least the year’s end.
Notably, Saudi Arabia’s economic expansion last year, almost 9%, was one of the swiftest among the Group of 20 nations. This robust growth was primarily propelled by record-breaking crude production and the turbulence in energy markets due to Russia’s conflict with Ukraine. This achievement enabled Saudi Arabia’s GDP to surpass the historic milestone of $1 trillion.
As of 7:40 a.m. in London, Brent crude was trading at around $88 per barrel, a decline from last year’s average of $100 per barrel.
Monica Malik, the Chief Economist at Abu Dhabi Commercial Bank PJSC, anticipates that the most substantial contraction in the oil sector is likely to have occurred in the third quarter. She further predicts a more moderate contraction in the oil sector in the fourth quarter, with production remaining relatively steady.
According to the World Bank, the Saudi economy is expected to shrink by nearly 1% in 2023.
In contrast, the non-oil sector, a focal point for diversifying the economy and a significant driver of employment, saw a 3.6% increase in growth, according to the preliminary data. However, the pace of acceleration in non-oil growth on a quarterly basis has tapered to 0.1%, representing the slowest growth since late 2020. Overall, the GDP has contracted by approximately 4% on a quarter-on-quarter basis.
Monica Malik observes, “The data concerning the non-oil sector suggests a deceleration in momentum, though the backdrop of high government spending is evident in the third-quarter data and is likely to be supportive.”
Weaning the Saudi economy off its dependence on oil sales forms a pivotal element of Crown Prince Mohammed bin Salman’s Vision 2030 plan, initiated in 2016. The government has indicated that it is likely to record deficits until 2026 as it intensifies investment in projects aimed at fostering new industries, such as tourism and manufacturing. Nevertheless, oil and closely-related products, including chemicals and plastics, accounted for nearly 90% of exports last year, as per Bloomberg Economics.
During the kingdom’s flagship financial conference, Finance Minister Mohammed Al-Jadaan expressed his primary concern about enhancing non-oil growth. He expects the non-oil sector to register an average growth rate of 6% by the end of this year.
By Bloomberg