Saudi non-oil growth accelerates in Q2

Real GDP growth for full year 2019 expected to be flat

RReport prepared by NBK

ecently released official data shows that in 2Q19 the Saudi non-oil economy expanded at the fastest rate (+2.9% y/y) since 2015, with growth driven by increased private (+3.4% y/y) and government sector activity (+1.8% y/y). Private sector growth was in line with improvements in other, higher frequency indicators of non-oil activity such as the Purchasing Managers’ Index (PMI) and private sector credit growth.

Headline growth, however, slowed considerably in 2Q19 (to 0.5% y/y from 1.7% in 1Q19) due to a contraction in oil sector output (-3.0% y/y), related to OPEC+ production cuts; Saudi Arabia has cut crude production far more aggressively than required. Real oil sector output fell by less than crude output (-3.7% y/y to an average of 9.75 mb/d) only due to the contribution of higher natural gas production.

At the sub-sector level, non-oil growth was led by output gains in the financial services (+5.4% y/y), transport & communications (+6.4% y/y), trade (+5.8% y/y) and construction (+4.9% y/y) sectors. Manufacturing, which includes refining, contracted (-2.3% y/y). Growth in government services, the largest contributor to non-oil GDP (23.5%), was weak (+0.8% y/y).

Note that the improvement in nonoil growth in 2Q19 is also perhaps overstated, since 2Q18 was a softer than usual quarter, with wholesale and retail trade, government services, construction and manufacturing all weak over those three months.

Looking ahead, real GDP growth for full year 2019 is expected to be flat, a marked slowdown from 2.3% in 2018 and a downward revision compared to our forecast in July of 1.0%. While the oil sector is expected to contract by 3.8% y/y (from 2.9% in 2018), the non-oil sector should grow by 2.5% y/y (vs. 2.3% in 2018), in line with our July forecast.