Saudi economy feeling the effects of oil output deal

SAUDI Arabia’s gross domestic product shrank from a year earlier in the first quarter of 2017 for the first time since the global financial crisis, but the private sector strengthened gradually, official data showed last Friday.

GDP — adjusted for inflation — shrank 0.5pc year-on-year between January and March, its first fall since 2009. That was almost entirely because of a 2.3pc contraction in the oil sector, as Saudi Arabia cut its crude output under a global deal among producing countries to prop up prices.

The non-oil government sector of the economy shrank 0.1pc, showing Riyadh continued to keep a tight rein on state spending as it tried to cut a big budget deficit caused by low oil prices.

But the non-oil private sector grew 0.9pc, accelerating from a revised 0.5pc in the fourth quarter of last year. It was the fastest private sector expansion since the fourth quarter of 2015.

Private businesses have been hit hard by austerity measures, including higher domestic energy prices and delays in the government paying its debts to companies. Late last year, however, Riyadh began settling its debts more promptly, boosting the private sector. The outlook for growth in the rest of this year is murky. In recent weeks Riyadh has eased its austerity drive slightly, and this should help consumption slightly. Also, the government plans to introduce a 5pc value-added tax in 2018, so there may be a consumption mini-boom in the preceding months as Saudis make big-ticket purchases to avoid the tax.

But some austerity steps are going ahead this year, such as higher residence fees for expatriates, who make up about a third of the population. Also, the oil output deal extends through the end of 2017, so the oil sector will continue to drag on growth.

Despite the deal, the Brent oil price is back around $48 a barrel — not far above its level when Riyadh originally agreed on the deal late last year — which may mean the government has less money to spend on kick-starting economic projects than the private sector has been hoping.