Tighter virus restrictions weigh on Saudi Arabia's economic recovery
Saudi Arabia’s tightening of COVID-19 restrictions has weighed on activity in the non-oil sector and the voluntary oil output cut has hit the hydrocarbon sector too.
But, with the vaccine rollout accelerating and oil production likely to increase soon, the recovery should regain momentum in the coming months, London-based consultancy Capital Economics said in a new note.
Final GDP figures for Q4 released earlier this month showed that the Saudi economy expanded by 2.5 percent quarter-on-quarter (q-o-q), following a 2 percent q-o-q increase in the previous quarter. However, this still left output 3.9 percent below its level from a year earlier. The kingdom’s economy contracted by 4.1 percent in 2020.
More timely figures show that the recovery has lost steam as the government tightened virus restrictions. In February, point of sale transactions and ATM withdrawals figures – proxies for consumer spending – fell at their fastest pace since May last year. Growth in local deliveries of cement, an indicator of construction activity, also slowed from 5.6 percent year-on-year (y-o-y) in January to 0.5 percent y-o-y last month, a nine-month low. The whole economy PMI also fell from 57.1 in January to a five-month low of 53.9 in February.
On a more positive note, private sector credit growth picked up from 14.4 percent y-o-y in January to 14.7 percent y-o-y last month. And while the Thomson Reuters/IPSOS survey of consumer confidence fell back to a three-month low in March, it remains well above its long-run average.
In the hydrocarbon sector, oil production growth slumped by 15.7percent y-o-y in February as the Kingdom’s voluntary 1 million barrels per day (bpd) output cut came into effect. And the government’s decision at the March OPEC+ meeting to roll over the voluntary cut through until at least the end of April and only raise output gradually thereafter, means that the drag on GDP growth will last a little longer.
Looking ahead, there is cause for optimism as the kingdom’s vaccination programme has picked up pace. New daily virus cases are at their highest since early October but, at around 500 per day, they are still well below their peak in July. At the same time, 12 per 100 people have been administered a dose of the vaccine so far and Saudi is on course to have given at least one dose of the vaccine to its vulnerable population in Q2.
“This will allow restrictions to be eased and give a lift to the non-oil sector. But tight fiscal policy will hold back the recovery and, overall, we expect the Saudi economy to grow by just 2.3 percent this year,” the report said.
