ECONOMY

Saudi Arabia’s non-oil sector grew 4.4% in the second quarter of 2024, compared to the same period last year, showing remarkable resilience.

The country’s year-on-year real gross domestic product (GDP) contracted by 0.4% in the second quarter, according to preliminary data released by the government's statistical authority. The decline was primarily driven by an 8.5% drop in oil activities, which has constrained overall growth for several quarters. In the first quarter of this year, GDP had already decreased by 1.7% as ongoing oil production cuts continued to weigh on the economy of the world's largest oil exporter.

Government activities also expanded by 3.6%, according to the General Authority for Statistics (GASTAT). On a seasonally adjusted quarterly basis, GDP growth remained flat at 1.4% from the first quarter, supported by a 3.2% rise in government activities and modest growth in both oil and non-oil sectors.

Saudi Arabia is currently undergoing a significant economic transformation under the government’s Vision 2030 initiative, which aims to diversify the economy away from oil dependence by investing hundreds of billions of dollars in new sectors and creating more sustainable revenue streams.

Lower oil revenues are expected to limit investment in non-oil sectors this year, potentially hindering broader economic expansion, economists warn. In July, the International Monetary Fund (IMF) revised down its GDP forecast for Saudi Arabia to 1.7% for this year, a reduction of 0.9 percentage points from its April projection. The IMF also noted that Saudi Arabia would need oil prices to approach USD 100 per barrel to balance its 2024 budget.

FDI SURGES

Saudi Arabia's foreign direct investment (FDI) balance saw a notable increase of 6.1% by the close of the first quarter of this year compared to the same period in 2023, underscoring growing confidence among international investors in the kingdom's investment climate.

According to a recent report from the Ministry of Investment, year-on-year FDI inflows grew by 0.6% during the first quarter of 2024. The ministry issued 2,728 investment licenses in the second quarter, reflecting the country’s attractiveness as an investment hub with robust competitive advantages, including a stable and business-friendly environment.

Moreover, total fixed capital formation, a key indicator of investment in physical assets, grew by 7.9% in the first quarter of this year compared to the same period in 2023. This growth was driven by significant increases in government and non-government sector investments, which rose by 17.8% and 7.2%, respectively

The report also highlighted positive performance across most economic sectors in the first quarter of 2024, with wholesale and retail trade, restaurants and hotels leading with a growth rate of 5.9%. The transportation, storage, and communications sectors followed closely with a 5% increase. Additionally, collective, social, and personal services, along with agriculture, forestry, and fisheries, also expanded by 4.5% and 4.4%, respectively.

BUSINESS SENTIMENT REMAINS UPBEAT

The latest S&P Global Ratings Purchasing Managers’ Index report indicates continued growth in business activity within the non-oil private sector at the onset of the third quarter of 2024. The uptick in output was primarily driven by heightened client demand and strategic marketing initiatives. However, the pace of new orders growth slowed to its weakest since January 2022, as competitive pressures and adverse weather conditions tempered overall expansion.

In response to fierce market competition, non-oil businesses were compelled to lower their selling prices, even as underlying input costs continued to rise. Notably, the reduction in charges was the most pronounced on record. Despite these challenges, employment and inventory levels saw a continued increase, though business confidence showed signs of wavering.

The seasonally adjusted PMI, a composite index derived from indicators such as new orders, output, employment, suppliers’ delivery times, and stocks of purchases, declined for the third consecutive month in July, falling to 54.4 from June's 55.0. This marks the lowest reading since January 2022, signalling solid, yet subdued, growth in operating conditions.

Both output and new orders, which are primary drivers of PMI, recorded slower expansions as the third quarter began. Output growth eased to a six-month low, while the increase in new business was the least marked in two-and-a-half years. Nonetheless, survey feedback highlighted generally favourable demand conditions, with higher sales and improved output across the surveyed sectors. Firms that experienced slower growth often attributed it to intensified market competition and capacity strains resulting from the ongoing heatwave.