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Growth of oil and non-oil sectors in Saudi economy

Growth of oil and non-oil sectors in Saudi economy



Manufacturing drives non-oil growth

Saudi Arabia’s non-oil private sector expanded output and purchasing at the fastest pace in over four years

01 May 2022

Amidst a challenging investment climate and geopolitical tensions that are dampening growth elsewhere, the Arab world’s largest economy, Saudi Arabia, is experiencing positive momentum.

Even though oil remains the dominant growth driver, much of the growth in 2021 has come from non-oil activity led by manufacturing, as shown by the official data.

A production line of Dammam-based Saudi Arabia Packaging Industries (Sapin)

A production line of Dammam-based Saudi Arabia Packaging Industries (Sapin)

In 2021, Saudi Arabia’s GDP grew 3.2 per cent – highest in seven years, rising 6.7 per cent in the fourth quarter of 2021, compared to the same period in 2020. The growth on the year was due to both the oil and non-oil sectors, and the latter increased 5.1 per cent in the fourth quarter of 2021, the Saudi General Authority for Statistics said in a report.

“Saudi Arabia’s growth surprised on the upside in 2021,” said Khatija Haque, Head of Research & Chief Economist, Emirates NBD Research said in her latest report. Validating her statement with more statistics, she said: “Saudi Arabia’s economy grew 3.2 per cent in 2021, faster than expected.  Mining & quarrying, the component measuring oil and gas output, was a drag on growth at -1.1 per cent year on year (yoy) despite recovering in half year (H2) 2021. However, the official estimate for total oil GDP was higher at 0.2 per cent yoy.  The non-oil (private) sector grew 6.1 per cent yoy, while value added by government services grew 1.5 per cent yoy. Overall non-oil GDP grew 4.9 per cent, in line with our 5 per cent forecast.”

 

FASTEST GROWING SECTOR

According to her, the fastest growing sector last year was manufacturing at 11.6 per cent yoy, more than offsetting the contraction of -9.0 per cent yoy in 2020 as both oil and non-oil manufacturing recovered sharply from the pandemic. Wholesale and retail trade and hospitality grew 8.7 per cent yoy, also fully rebounding from the contraction in 2020. Financial services (5.8 per cent) and transport, storage & communications (3.8 per cent) also contributed to the overall non-oil sector recovery, as did utilities and construction.

On the expenditure breakdown of GDP, private consumption (which contracted -6.3 per cent yoy in 2020) was the main engine of growth in 2021 rising 9.7 per cent in real terms, the fastest rate since 2012. This was likely due to Covid-related travel restrictions on Saudi nationals limiting their travel abroad as well as increased opportunities and avenues for leisure and entertainment spending in the kingdom in recent years. 

The other main driver of growth in 2021 was gross fixed capital formation, which rose 10.1 per cent yoy after contracting almost -12 per cent in 2020. This was driven by private sector investment, according to the official statistics, with public investment declining for the third year in a row. This is consistent with declining capital spending in the government’s budget from 2018-2021 and suggests that sovereign wealth fund investment may be classified as “private”.

 

NON-OIL ACTIVITY EXPANDS

The good part is that the growth story is continuing through March despite ongoing global tensions and challenges. Saudi Arabia’s non-oil private sector expanded output and purchasing at the fastest pace in over four years but cost pressures, partly due to the war in Ukraine, added to the firms’ expenses, a business survey showed.

The seasonally adjusted IHS Markit Saudi Arabia Purchasing Managers’ Index (PMI) rose to 56.8 in March, rising from 56.2 in February and staying above the 50 mark that separates growth from contraction.

The reading was also the highest recorded since November last year to signal a sharp improvement in business conditions across the non-oil private sector economy.

David Owen, Economist at S&P Global, said: “The Saudi Arabia PMI continued to signal strong growth in the non-oil economy in March, as new business and activity rose sharply in line with recovering client demand.”

Supply chains also displayed strength, he said, with lead times shortening to the most in three years. Companies raised their purchasing at the fastest rate since December 2017, supporting higher capacity levels.

Three of the five sub-indices of the PMI rose over the latest survey period, most notably the Output Index which rose to its highest level since December 2017. Approximately 28 per cent of panelists found that output had risen from the previous month, often relating this to an increase in new orders and project work.

With output and new orders rising sharply, firms raised their input purchases. The expansion in input buying was the fastest registered since December 2017 and resulted in a sharp and quicker uplift in inventory levels.

The improved supply of inputs cut the outstanding work, continuing the trend seen since February 2020. Although the decline in backlogs was only marginal, some firms sought to reduce their labour capacity, leading to the first drop in employment for a year.

Firms remained upbeat in their outlook for the future, albeit slightly less so compared to February. While some expected a rise in output over the next 12 months, the level of sentiment remained weak compared to the historical trend, S&P Global said in its report.




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