Oil cuts add to Saudi pain as GDP contracts for second quarter

By Alaa Shahine and Dana Khraiche on 10/2/2017

DUBAI and BEIRUT (Bloomberg) -- Saudi Arabia’s economy contracted for two quarters in a row for the first time since the global financial crisis, as the kingdom grapples with low oil prices and its businesses struggle to cope with economic reforms.

The kingdom’s gross domestic product shrank 1% in the second quarter from the same period a year earlier, when it expanded 0.9%, according to official data released on Saturday. The economy had contracted 0.5% in the first three months of 2017.

Crown Prince Mohammed Bin Salman is leading the push to transform the biggest Arab economy at a time when crude prices are at about half their 2014 peak. But as authorities seek to reduce the kingdom’s reliance on oil, they’re also leading efforts among OPEC members and some other major producers to bolster prices by cutting output. The kingdom’s oil GDP shrank 1.8% in the second quarter, weighing on overall activity.

The data also showed how non-oil industries are still struggling with efforts to overhaul the economy and shore up public finances. The non-oil GDP, the main engine of job creation, expanded below 1%, driven mainly by the government sector, the data show.

“There is very little capital spending going on in Saudi Arabia at the moment,” Mohamad Al Hajj, an equities strategist at the research arm of EFG-Hermes in Dubai, told Bloomberg TV in an interview.

The Saudi economy hasn’t contracted for two quarters in a row since at least 2010, official data show. The kingdom doesn’t publish quarterly seasonally-adjusted data, which is used by some economists to define a recession.

Figures released by the government’s statistics agency also show:

Within non-oil GDP, private sector activity grew 0.4% after expanding 0.9% in the previous three months The government sector expanded almost 1% The construction industry shrank 1.6% after contracting 3% in the first quarter Petroleum refining expanded 5.8%.

The kingdom’s Tadawul All Share Index retreated the most in the Middle East, falling 0.9% at 12:21 p.m. in Riyadh.

“What we’re seeing is stagnation in non-oil activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Second-quarter data show still very lackluster demand” even after the government reversed a decision to cut or freeze bonuses and allowances for state employees, she said.

A Bloomberg survey conducted before Saturday’s release show economists expect growth to grind to a halt this year, compared with a growth forecast of 0.5% in the previous poll.

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