• Non-oil economy contracts for second consecutive quarter in 1Q16 Saudi Arabia’s non-oil economy contracted 0.7% Y-o-Y in 1Q16 following 0.5% contraction in 4Q15 as continued fiscal retrenchment weighed heavily on economic activity. The retrenchment had a spill-over effect on the private sector which grew only 0.2% Y-o-Y in 1Q16 down from 3.5% in 4Q15. On an expenditure basis, we suspect the declines were driven by lower public consumption and investment (indeed both registered double-digit declines in nominal terms). Overall GDP growth decelerated slightly to 1.5% in 1Q16 from 1.8% in 4Q15 as increased crude production continued to support headline GDP growth despite the contraction in the non-oil economy (Fig. 2). Oil GDP growth accelerated to 5% in 1Q16 as Saudi Arabia continued to compete for market share, but it is showing signs of deceleration in 2H16 (Fig. 3).
• Construction, trade and manufacturing show poorest performance In addition to a contraction in government services, construction, wholesale, retail trade, and manufacturing contracted in the quarter. This comes as no surprise: subsidy cuts, delayed payments and lower take-home pay weighed on general spending and investment levels, with 1Q16 results showing a similar impact on earnings. Unsurprisingly, the utility sector also saw contraction – albeit a minor 0.2% Y-o-Y – as the economy quickly reacted to higher fuel and water prices. Interestingly, agriculture also showed a notable slowdown in growth (0.3% Y-o-Y in 1Q16 compared to an average 1.4% expansion in the previous two years) – the sector may have also been affected by subsidy cuts.
• Headline outturn in line with current headline growth estimate While the outturn is largely in line with our 1.6% GDP growth forecast for 2016, the impact of the fiscal retrenchment on the non-oil economy is stronger than what we had initially expected. We will therefore adjust our forecasts to account for the contraction in the non-oil economy in 1Q16 and the recovery in oil prices in 1H16, but headline GDP figures may remain relatively unchanged.

Mohamed Abu Basha