Saudi Arabia’s economy is facing a challenging outlook as recent preliminary GDP figures reveal the country has entered a “technical recession,” as reported by Capital Economics, a London-based research firm.
The primary cause of this economic downturn is the reduction in oil production, despite the non-oil economy showing resilience. Saudi Arabia’s decision to voluntarily decrease its daily oil output by 1 million barrels a day has played a significant role in the current economic situation. This reduction is expected to continue following the latest OPEC+ meeting.
As a consequence, the economy is likely to contract for the entire year. The second quarter saw a 0.1% decline in GDP quarter-on-quarter, following a 1.4% drop in the first quarter. Year-on-year growth also slowed significantly from 3.8% in Q1 to 1.1% in Q2.
The oil sector has been hit the hardest, contracting by 1.4% quarter-on-quarter due to OPEC+ oil production cuts. Despite the non-oil sector showing promising growth of nearly 2 percent quarterly, the decline in oil GDP has overshadowed these improvements.
Saudi Arabia’s response:
To address the situation, Saudi Arabia has implemented even stricter cuts to its oil production in the third quarter, with an additional voluntary reduction of one million barrels per day in July and August. Experts predict that this move will offset any strength in the non-oil sector, leading to a 3 percent quarter-on-quarter contraction in GDP during the third quarter.
There is a growing likelihood that the upcoming OPEC+ Joint Ministerial Monitoring Committee meeting will result in the kingdom extending this voluntary cut until at least the end of September. If this extension occurs, the economy is expected to shrink by approximately 0.5 percent over the entirety of 2023, marking the worst GDP performance in over two decades, excluding the impact of the global financial crisis and the pandemic.
The International Monetary Fund (IMF) has also downgraded its GDP growth projection for Saudi Arabia in 2023 to 1.9 percent, citing the lingering impact of extended oil production cuts.
In an effort to further support the oil market, Saudi Arabia is reportedly planning to prolong its voluntary oil output reduction of 1 million barrels per day for an additional month, covering September. This move aims to provide crucial support to the global oil market, which has been experiencing price fluctuations.
As a result of these developments, oil prices surged significantly, marking the most substantial monthly gain in over a year.
