Saudi Arabia’s economy has slipped back into recession

Saudi Arabia’s economy has slipped back into recession as the oil sector stagnates and the government sector is hit by austerity policies designed to curb a state budget deficit caused by low oil prices.

Gross domestic product, adjusted for inflation, shrank 2.3 per cent from the previous quarter in the April-June period, after dropping 3.8pc in the first quarter. Economists generally define a recession as two straight quarters of shrinking GDP, measured by quarter-on-quarter rates. Saudi Arabia was last in recession — a shallower one — in early 2016.

A price-supporting agreement among global oil producers caused Saudi Arabia to reduce its oil output early this year, pulling down GDP. The oil sector shrank 1.8pc from a year ago in the second quarter after a 2.3pc fall in the first.

The agreement is due to run to the end of next March but Opec and industry sources say they expect the output cuts to be extended further, so the Saudi economy may not get a boost from its oil sector for many more months.

Meanwhile, the government has curtailed spending to avoid a financial crisis due to lower oil export revenues. As a result, the non-oil state sector grew just 1.0pc from a year ago in the second quarter after shrinking 0.1pc in the first.

Without much support from state spending, the private sector has struggled. It grew only 0.4pc from a year earlier in the second quarter, slowing from growth of 0.9pc in the first quarter.

Saudi Arabia’s plans to sell state assets - including a stake in energy giant Saudi Aramco - are becoming even more important to its finances as a recession slows Riyadh’s effort to close a budget deficit caused by low oil prices.

Last December, Riyadh released a plan to abolish the deficit by 2020, cutting it from $79 billion (£60 billion) or 12.3 percent of gross domestic product in 2016 via steps such as domestic energy price hikes and tax rises. The plan eased investor fears about Saudi Arabia’s fiscal stability and reduced pressure on its currency.

Many economists expect the government to hit its deficit target of $53 billion or roughly 8 percent of GDP this year, helped by higher oil prices.

One austerity step, imposing a 5 percent value-added tax, looks likely to go ahead in January; an IMF official said official preparations for it were proceeding well. VAT may raise around $13 billion in annual revenues, the IMF has estimated.

But VAT will be a heavy drag on the economy, equal to about 2 percent of GDP. Growth of the non-oil sector of the economy has already dropped near zero, so there may be little room for Riyadh to introduce more austerity over the next 12 months - or at the very least, it may need to soften its steps.