Editor’s Note:
The Jadwa Investment firm in Riyadh provides a steady stream of insightful analyses on Saudi economic developments. This week Jadwa released a report on performance in the Kingdom for the first quarter, which noted a 5.9 percent year-on-year growth in the economy. On the last day of last year Jadwa issued its “Saudi Economy in 2012″ report with a forecast for this year’s performance. It began:
We expect another year of reasonable economic performance in 2012. Non-oil growth will be strong and inflation should ease. Lower oil production will cause total real economic growth to slow, and combined with lower oil prices, will reduce the budget and current account surpluses. High government spending will remain the engine of the non-oil economy.
Today SUSRIS is pleased to provide the first quarter summary and a link to the complete report, complete with illuminating charts and graphs. SUSRIS thanks Jadwa Investment’s Chief Economist and Head of Research Paul Gamble for providing this insightful report for your consideration.
[Complete report [English] with very helpful charts, graphs and tables at this link.]
[Complete report [Arabic] with very helpful charts, graphs and tables at this link.]
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Healthy First Quarter Economic Growth | Jadwa Investment
June 2012
Latest economic growth data confirm that the healthy performance of the Saudi economy continued into the first quarter of 2012. In real terms (that is, adjusted for price movements) the economy was 5.9 percent larger in the first quarter of 2012 than in the same quarter of 2011. Growth was lower than in the previous three quarters and more dependent on the oil sector, as the effects of short-term government stimulus eased. However, performance remains robust even when the oil and government sectors are removed.
At 5.9 percent, year-on-year growth in the first quarter was down from 7.4 percent in the final quarter of 2011. Quarterly real GDP data has only been published since 2010 and the first quarter reading was the slowest since the first quarter of 2011. The slowdown was fairly broad based, with only oil and utilities (electricity, gas and water) growing at a faster pace than in the fourth quarter. Nonetheless, each sector of the economy grew.
Real GDP growth
(percent change, year-on-year)
At 7.7 percent, growth in the oil sector was the fastest of the five quarters for which data is available. This was heavily influenced by the move in oil production, which was up by 13.2 percent over the same period. Oil production is the central driver of the performance of the oil sector and the divergence between the growth in oil production and the oil sector is surprising and likely to be revised in future. As oil production increased significantly in June 2011, the boost to GDP from the oil sector will fade in the coming quarters.
Construction was the fastest growing sector, at 9.1 percent. This is due to huge activity in building infrastructure, commercial and increasingly residential projects. The large government spending allocated to boosting the provision of housing will keep construction one of the fastest growing sectors for the next few years. Utilities and transport and communication both also grew at around 9 percent. For the former, this reflects government investment in increasing supply in the face of rapidly growing demand. Transport and communication growth stems from the need to move a high volume of goods around the Kingdom (both imports and construction materials) and the ongoing rise in mobile telecom and data services.
Year-on-year growth in manufacturing and wholesale and retail trade both dropped to their lowest levels in the five quarters for which data is available. In both cases, growth was still robust, at 8.4 percent and 6.6 percent respectively. The slowdown in manufacturing growth may reflect weaker demand from abroad. For wholesale and retail trade it was probably due to the lessening impact of the bonus for public-sector workers in the first quarter of last year.
Stripping out the oil sector, the slowdown in the economy in the first quarter was more pronounced. Non-oil economic growth dropped to 5.6 percent, its lowest during the period which data is available, from 8.2 percent in the fourth quarter. However, with growth in the government sector declining at a faster pace, to only 2.8 percent in the fourth quarter, excluding the oil and government sectors economic growth was a robust 6.4 percent. While this is not calculated in the same way as non-oil private sector growth, it points to another quarter of strong performance by the private sector.
In quarter-on-quarter terms, the economy shrunk by 13 percent. However, this was in line with the seasonal trend; quarterly growth was –11 percent in the first quarter of 2011. Two sectors record large quarterly drops in output in the first quarter. The first was utilities (down by 16 percent quarter-on-quarter), which reflects the drop in residential and commercial power demand due to much lower use of air conditioning. The second was the oil sector (down by 54 percent quarter-on-quarter); the reason for this fall is unclear and not related to oil production. For most other sectors of the economy, quarterly output recorded double digit growth, again due to a seasonal factor, the impact of Eid al-Adha, which in recent years has fallen in the fourth quarter.
Real GDP growth
(percent change, quarter-on-quarter)
We assume that year-on-year economic growth will ease further in the second quarter. In addition to much lower growth in oil production, the impact of the bonus for public-sector workers will be less pronounced (cash withdrawals from ATMs were down by 10 percent in year-on-year terms in April, compared to a 14 percent rise in the first quarter). Furthermore, the renewed intensification of problems in the Eurozone and apparent slowing of the global economy will dent output. Nonetheless, high government spending will continue to support the economy and the construction sector is strong (cement sales in April and May are 10 percent higher than one-year earlier). Furthermore, year-on-year growth in bank lending hit a three-year high in April and business surveys point to further rapid expansion of the private sector. While local fundamentals are solid, with considerable uncertainty over the path of the global economy we maintain our forecast for total real GDP growth for 2012 at 5.2 percent.
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About Jadwa Investment – Jadwa Investment is a Saudi Closed Joint Stock company operating under the supervision of the Saudi Arabian Capital Markets Authority (CMA). Under the CMA decision published on August 21, 2006, Jadwa was awarded a license to offer all types of investment services including dealing, managing, custody, arranging and advising. All investment services offered by Jadwa Investment are supervised by a Shariah Supervisory Board and are fully Shariah-compliant.
For comments and queries you can contact the author:
Paul Gamble, Chief Economist and Head of Research
pgamble@jadwa.com
***
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