Saudi Arabia economy contracts as oil production drops

During the third quarter, Saudi Arabia’s economy experienced its most substantial contraction since 2020 as the kingdom reduced oil production to boost prices. According to preliminary data from the General Authority of Statistics, the Gross Domestic Product (GDP) shrank by 4.5% compared to the same period the previous year. This decline was primarily driven by a 17% drop in the oil economy, while growth in the non-oil sector also decelerated.

This 4.5% contraction represents the largest drop in three years, harkening back to the early days of the global coronavirus pandemic. It’s also the first decline in output since the beginning of 2021. Saudi Arabia, as the world’s largest crude exporter, initiated a unilateral oil production cut in July, reducing output to 9 million barrels per day. Currently, the kingdom is producing nearly 1 million barrels per day below its average for the past decade and is expected to maintain this output level at least until the end of the year.

In 2022, the Saudi economy achieved nearly 9% growth, the highest among G20 nations. This growth was driven by record crude output and turmoil in energy markets due to Russia’s conflict in Ukraine. This milestone allowed Saudi Arabia’s GDP to surpass $1 trillion for the first time.

Brent crude was trading at approximately $88 per barrel at the time of the report, down from last year’s average of $100 per barrel. Monica Malik, Chief Economist at Abu Dhabi Commercial Bank PJSC, anticipates a contraction of 0.8% in the Saudi economy this year, with the sharpest contraction in the oil sector likely occurring in the third quarter.

The World Bank estimates that the Saudi economy will shrink by nearly 1% in 2023. Non-oil growth, a key focus of Crown Prince Mohammed bin Salman’s economic diversification efforts, increased by 3.6%, according to the preliminary data. However, on a quarterly basis, non-oil growth showed a modest 0.1% increase, marking the slowest acceleration since late 2020. Overall GDP contracted by around 4% quarter-on-quarter.

The Saudi government is dedicated to reducing the economy’s dependence on oil sales, a vital aspect of the Vision 2030 plan launched in 2016. The government expects to record deficits until 2026 as it accelerates spending on projects aimed at nurturing new industries, such as tourism and manufacturing. Nevertheless, oil and related products still accounted for about 90% of exports in the previous year, according to Bloomberg Economics.

Finance Minister Mohammed Al-Jadaan has expressed his primary concern about boosting non-oil growth, aiming for the sector to average 6% growth by the end of the year. Economic diversification remains a central goal in Saudi Arabia’s economic strategy.