DUBAI (Reuters) – Saudi Arabia’s economy shrank by 7% in the second quarter, a sign of how deeply the new coronavirus hit both the oil and non-oil sectors, while unemployment hit a record high of 15.4%, official data showed on Wednesday.
The world’s largest oil exporter is facing a deep recession after the COVID-19 pandemic curbed global crude demand and measures to contain the coronavirus hurt domestic activity.
“The private sector and the government sector recorded a negative growth rate of 10.1% and 3.5%, respectively,” said the General Authority for Statistics.
The Saudi unemployment rate was “largely impacted by the effects of the COVID-19 pandemic on the Saudi economy,” it said.
In the first quarter, Saudi Arabia posted a 1% economic contraction, but that only captured part of the oil price collapse and the impact of the pandemic, which escalated in March.
Back then, the oil sector slumped by 4.6%, while the non-oil sector posted a positive growth rate of 1.6%.
But the coronvirus-driven lockdowns were bound to impact the Saudi economy hard in the second quarter.
The non-oil sector, which is the focus of Saudi reforms aimed at diversifying the economy away from crude revenues, shrank by 8.2%, while the oil sector declined by 5.3%, the statistics authority said.
The overall quarterly GDP performance was the largest year-on-year drop since the quarterly series began in 2010, Capital Economics said.
“No surprises in the pace of decline. Non-oil GDP was going to be hit harder with the lockdowns. Oil contraction instead was partly limited by the marked ramp up in oil output in April,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“More important is going to be the ongoing impact of Covid and the continued low oil price. Fiscal retrenchment and tightening will result in a weak domestic economic backdrop and a weak outlook for private sector job creation for nationals,” she said.
Saudi Arabia tripled a value-added tax in July to boost non-oil revenues, but that is limiting domestic demand, dampening economic recovery.
Consumer spending fell 5.5% year on year in August, as the VAT hike kicked in, said Arqaam Capital, citing August central bank data. Inflation meanwhile spiked to 6.2% in August, due to the VAT increase.
The tax hike “weighs on disposable income, and largely offsets the benefit of travel restrictions that drive local demand,” Arqaam said in a research note, referring to expectations of higher domestic demand as Saudi Arabia’s borders were shut to contain the virus outbreak.
Reporting by Davide Barbuscia; Editing by Simon Cameron-Moore and Raissa Kasolowsky