RIYADH – In real terms, the Saudi economy was 3 percent higher in the third quarter of 2013 than in the same quarter of 2012 and 1.1 percent higher than in the second quarter of this year, Jadwa Investment said in a report citing Central Department of Statistics and Information (CDSI) GDP data for the third quarter of this year. Moreover, Jadwa expects year-on-year economic growth will improve in the fourth quarter as the negative impact of changes and enforcement of labor market regulation on private sector activity slightly ease. At the same time, both elevated government spending and stabilizing oil output will balance overall economic growth. “We expect Saudi oil production to average 9.7mbpd in the fourth quarter which should maintain an oil sector growth rate above 3.5 percent year-on-year in the fourth quarter. In addition, high government spending will continue to support the non-oil economy.” At the same time, year-on-year growth in bank lending remained positive despite recent slowdown while business surveys point to further expansion of the private sector. With solid local fundamentals, but considerable uncertainty over regional instability, “we maintain our forecast for total real GDP growth for 2013 at 4 percent down from 5.1 percent last year.” Elevated oil production pushed the oil sector to its highest annual growth since the second quarter last year while the growth of the non-oil sector recorded an all-time low due to both base effect and changes in labor market. “We expect year-on-year economic growth to pick up in the fourth quarter as the contribution of the oil and public sector improves, “ Jadwa said. CDSI said the Kingdom's real GDP posted growth of 3 percent year-on-year in the Q3, up from 2.7 percent in the previous quarter but lower than the 5.7 percent recorded in the third quarter last year. The increase in Saudi oil production since the end of the second half was the main driver behind this growth as the oil sector's contribution turns positive for the first time since the last quarter of last year. The contribution of the non-oil sector also remains robust despite a slower growth in a number of leading sectors. Jadwa said the oil sector's contribution to overall GDP growth was expected to turn positive in the third quarter. At 3 percent year-on-year, the oil sector registered its strongest growth since the second quarter of last year. This was heavily influenced by the move in oil production. The Kingdom's oil output averaged 10.1 million barrel per day (mbpd) in the third quarter compared with 9.8mbpd for the same period last year; a growth of 3.7 percent year-on-year. This increase in oil production was mostly due to elevated domestic oil consumption during the summer months as well as to offset the shortfall in global oil production. Jadwa expects a slower but still positive growth in the oil sector in the fourth quarter as domestic crude consumption eases, but external demand remains firm. Stripping out the oil sector, the Saudi economy grew by 3.1 percent year-on-year down from 4.5 percent in the previous quarter and 6.7 percent in the same period last year. In fact, growth in the non-oil sector was the slowest of the eleven quarters for which data is available. The slowdown was fairly broad based with both private and public sector recording their lowest quarterly growth levels for which data is available. Private sector growth slowed to 3.3 percent year-on-year from 4.2 percent in the second quarter and from 4.3 percent in the same period last year. The slower growth reflects both normalization of growth as the impact of the 2011 fiscal stimulus gradually fades away and as a result of introducing new and stricter labor market regulation. The non-oil public sector grew by 2.4 percent year-on-year, down from 5.5 percent in the previous quarter. This sharp slowdown was mostly due to large base effect, meaning that the figure represents an annual rise over an all-time high growth of 14 percent year-on-year in the third quarter last year. “We maintain our view that elevated demand on government services is expected to maintain a firm public sector growth over the next few quarters,” Jadwa said. With the exception of the petroleum refining, all sectors registered a positive year-on-year growth in the third quarter, though most sectors recorded a slower growth compared to year ago. Construction, non-oil manufacturing, Transport, storage and communication and utilities (electricity, gas and water) were among the fastest growing sectors. The growth of the construction sector, however, slowed compared to the second quarter, but was still robust at 5.7 percent year-on-year and higher than the 4.9 percent growth in the same period last year. Slower growth compared with the previous quarter may reflect the combined effect of the recent changes and enforcement of labor market regulation as well as slower construction activity during the summer months. However, Jadwa expects the impact of changes and enforcement of labor market regulation to be temporary as the sector adjusts to this new norm. On the upside, the sector will continue to benefit from vast activity in building infrastructure, commercial and residential projects. Non-oil manufacturing was the second fastest growing sector in the third quarter, rising by 4.8 percent year-on-year. While this growth is still lower than the previous quarter (5 percent), it is significantly higher than in the same period last year (0.8 percent). This solid growth reflects the strong local demand for manufactured products, especially those used for construction, such as cement and steel as well as the revive in external demand for both petrochemical and plastic products. The Kingdom's exports of both petrochemical and plastic grew by 13.4 percent year-on-year in the third quarter. Year-on-year growth in transport and wholesale and retail trade both dropped significantly compared to a year earlier. The former expanded by 3.2 percent year-on-year in the third quarter compared with 6.8 percent in the same period last year, while the wholesale and retail trade sector hit an all-time low of 2.7 percent year-on-year in the third quarter this year. In both cases, we think the slower growth was caused by the recent changes and enforcement of labor market policies. With this initial shock behind us, we expect these two sectors to maintain the positive growth with risks to the upside as retail sector benefits from higher income while the transport sector benefit from positive spillover from the robust performance of the manufacturing and construction sectors. In quarter-on-quarter terms, the economy expanded by 1.1 percent. This was in line with the seasonal trend; quarterly growth was 0.8 percent in the third quarter of 2012 and 0.6 percent for the same period 2011. Oil sector (6.3 percent) and utilities (14.5 percent) were the main drivers of growth on quarter-on-quarter terms. At the same time, two sectors recorded large quarterly drops in output in the third quarter again due to seasonal factors. The first was transport and communication sector with –4.4 percent growth and the second is finance, insurance and real estate which contracted by 2.9 percent quarter-on-quarter. — SG
