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INSIGHT: Silver lining for Saudi non-oil growth

In his commentary piece to AMEinfo, Bloomberg Middle East Economist Ziad Daoud said that Saudi Arabia’s non-oil growth had been stagnant for the last couple of years, undermining government efforts to reduce dependency on oil.

He said: “But non-oil growth is showing signs of recovery, with Bloomberg Intelligence (BI) Economics’ new monthly series of Saudi GDP indicating non-oil growth picking up in July and August, though not by enough to offset the decline in oil output.”

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GDP struggles

“Overall headline GDP is still shrinking compared with last year.

Saudi Arabia’s GDP contracted by 1 per cent in 2Q relative to a year earlier, largely reflecting lower oil production following an agreement among OPEC member states in November. What was particularly concerning was the anemic growth of the non-oil sector, which expanded by only 0.6 per cent,” Daoud said.

“The segment has shown little growth momentum, expanding at less than 1 per cent since the beginning of 2016.”

Data lag

The problem is particularly acute in Saudi Arabia, because of the lengthy publication lag – the data are typically published three months after the end of the quarter. This is a long wait for policymakers and investors seeking to understand the economic impact of the decision to reverse cuts in public sector allowances or of the diplomatic dispute with Qatar in a more timely manner,” Daoud explains.

BI Economics has constructed a monthly measure of economic activity, which mimics the behavior of GDP. The Bloomberg Monthly GDP for Saudi Arabia is a combination of two sub-indicators: the oil and non-oil sectors. The model makes use of monetary and financial variables such as real. Variables like ATM cash withdrawals, money supply growth, points of sale transactions and bank clearings of cheques that gauge performance of the non-oil economy are published with a one-month lag.

New data shows growth

“Annual growth in all of the mentioned variables has accelerated in July and August, compared with the second quarter. The monthly non-oil growth series shows growth of about 2 per cent year-on-year in the non-oil sector in July and August.

That represents a slight pick-up compared with recent months. If growth persists at this rate until the end of the year, the non-oil sector will show an average expansion of 1.3 per cent in 2017,” Daoud said.

He continued: “Broadly-speaking, the business surveys support the view that non-oil activity has picked up in the second half of the year. The Emirates NBD PMI survey has improved since Q2; and the latest survey, released Oct. 3, shows that the improvement continued in September.

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Oil drag

Daoud said that the drag from the oil sector had deepened in July and August, according to monthly production statistics published by OPEC.

“As a result, the Bloomberg Monthly GDP indicator shows that the Saudi economy contracted by about 0.8% in July and August, compared with a year earlier.

The drag from oil production cuts will probably persist until the end of 2017, as Saudi Arabia continues to comply with the OPEC deal. Oil output could decline by as much as 3% for the year as a whole, leading to an overall growth rate of -0.7%,” he said.

“But the fluctuation in oil production may mask the real story: there’s a silver lining for Saudi non-oil growth.”

Read: Emirates NBD: UAE, Saudi enjoy robust non-oil private sector growth