Saudi Arabia’s non-oil economy has started to lose momentum, as the shift to “a more aggressive” oil production will weigh on oil prices, means a greater level of fiscal consolidation is in the pipeline, which will in turn depress non-hydrocarbon activity further, London-based research house Capital Economics (CE) said in a note seen by EnterpriseAM.

Signs of weakness: Non-oil business activity in the Kingdom grew at its slowest rate in eight months in April, in a slowdown that was primarily driven by a drop in new order growth. The seasonally adjusted headline figure came in at 55.6 in April, dipping from a reading of 58.1 in March. CE also noted that the Ipsos/LSEG survey of consumer confidence has slipped to its lowest reading since July. Timely point of sale transactions data have also shown a slump so far in 2Q, although most measures of consumer spending were strong over 1Q, CE added.

“Low oil prices suggest that activity in the non-oil economy will remain soft,” as lower oil export receipts are projected to widen the Kingdom’s twin budget and current account deficits. “The focus appears to be turning toward fresh fiscal consolidation to smooth the adjustment. Recent reports point to cuts to capital spending focused on gigaprojects. More goods are also now subject to the 15% VAT rate,” the note reads.

REMEMBER- Recent flash estimates from the General Authority of Statistics (Gastat) showed that Saudi Arabia’s economy expanded 2.7% y-o-y in 1Q 2025, driven by a 4.2% increase in non-oil activities and a 3.2% rise in government services. Oil activities declined 1.4% in the quarter as the Kingdom continued to implement voluntary output cuts under Opec+ agreement.

On a quarterly basis: The Kingdom’s seasonally adjusted real GDP rose 0.9% q-o-q in 1Q 2025, largely driven by a 4.9% q-o-q jump in government activities and a 1.0% increase in non-oil activities. Oil activities fell by 1.2% compared to 4Q 2024, softening the overall momentum.

While the oil sector has been “a drag on growth,” CE sees a potential reverse, as OPEC+ shifted towards regaining oil market share. The hike is estimated to “lift the Kingdom’s oil production from 9 mn bpd in April to 9.2 mn bpd in June – a 3% q-o-q increase in output from Q1,” according to the note.

Looking ahead: Crude production in Saudi Arabia is expected to surge 13% from the current level to 10.1 mn bpd, according to CE estimates, as it expects OPEC+ to fully unwind the 2.2 mn bpd of voluntary oil output cuts by 4Q. This will boost oil GDP and elevate overall GDP growth by some 0.8% to 4.8% this year. The figure is well below the IMF’s growth forecast of 3.7% next year.

Growth in the non-oil sector will likely weaken to below 3% y-o-y as of the year-end, and further slow to less than 2% y-o-y by 2026, “which would be more akin to the growth rates recorded in 2016-2017 than those seen in recent years.”

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