As Saudi Arabia gears up to release its first official estimate of the 2023 real gross domestic product (GDP), expectations are set for a slight economic contraction of about 0.5% compared to the previous year. This anticipated downturn is primarily attributed to a 7% decline in real oil GDP, following significant reductions in crude oil production in May and July of 2023. Despite this, the non-oil sectors are predicted to have flourished, growing by an impressive 4%, fueled by robust private consumption in burgeoning industries such as entertainment and tourism. These thriving sectors, alongside ongoing labor market reforms, have spurred substantial job creation, leading to a drop in the Saudi unemployment rate to 8.6% in the third quarter of 2023, down from 9.9% the previous year. However, recent data reveals some concerns: a deceleration in non-oil growth as the year progressed and a noticeable slowdown in investment spending, crucial for productivity enhancement and economic diversification.
Anticipating a Resilient 2024
Looking ahead to 2024, forecasters are tasked with determining whether the slowdown in non-oil growth and investment spending is temporary or indicative of a longer-term trend. Several uncertainties loom, including the dynamics of the global oil market, regional conflicts, U.S. monetary policy shifts, and the impact of domestic reforms.
- Global Oil Market Dynamics
Oil production outside the OPEC+ coalition is on the rise, with the U.S. achieving record crude oil outputs recently. This surge has pressured oil prices, prompting OPEC+, and particularly Saudi Arabia, to cut production to stabilize the market. Saudi Arabia has committed to extending these cuts through the first quarter of 2024, with future production adjustments dependent on market conditions. While OPEC anticipates a modest increase in crude demand for 2024, the potential remains for Saudi Arabia to cautiously restore some of the production cuts made in 2023, without destabilizing prices.
- Regional Conflicts and Global Uncertainties
The ongoing conflict in Gaza poses risks to business confidence in Saudi Arabia, potentially impacting investment, consumption, and tourism. Additionally, disruptions in oil shipments could temporarily inflate oil prices, affecting exports.
- Shifts in U.S. Monetary Policy
The U.S. Federal Reserve is anticipated to reduce policy interest rates in 2024 as inflation targets are approached. This shift could result in lower interest rates in Saudi Arabia, given the riyal’s peg to the U.S. dollar. Although the direct correlation between interest rates and growth in Saudi Arabia has historically been weak, this relationship is expected to strengthen as the financial sector evolves. A timely reduction in U.S. rates could weaken the dollar, enhancing the competitiveness of Saudi non-oil exports.
Harnessing Reforms for Future Success
Saudi Arabia’s ambitious reforms aim to fortify legal and regulatory frameworks, develop new economic sectors, deepen financial markets, encourage foreign investment, and boost labor market participation, especially among women. The International Monetary Fund (IMF) suggests these reforms could significantly bolster non-oil sector growth. While the exact impact for 2024 remains uncertain, new initiatives like the Regional Headquarters Program show promise.
Forecasts suggest that real GDP may grow by 1.5% in 2024. If oil production reaches 9.5 million barrels per day by year-end, real oil GDP could decline by about 2%. Should monetary policy ease and structural reforms succeed, the non-oil sector might expand by 3% to 4%, despite reduced fiscal support and potential lower oil prices.
While achieving the ambitious growth targets set by Vision 2030 might be challenging, a 3% to 4% expansion in the non-oil sector would still be a commendable achievement, especially if it coincides with further unemployment reduction. As the IMF suggests, sustainable non-oil growth is pegged at 4%, balancing inflation and current account stability. Ultimately, enhancing Saudi Arabia’s productivity through strategic investments in human capital, infrastructure, and high-tech industries, along with increased workforce participation, will be key to realizing stronger non-oil growth.
