ECONOMIC TRENDS

SAUDI GDP POSTS STRONGEST GROWTH IN 10 YEARS

Saudi Arabia’s economy recorded its best performance in a decade in the first quarter of 2022. Gross domestic product surged 9.6%, compared to the same period last year.

The oil sector led the growth, rising 20.4% in the quarter followed by the non-oil sector, which jumped 3.7%, while government services climbed 2.4%, according to the General Authority for Statistics (GaStat).

“Seasonally adjusted real GDP grew by 2.2% in Q1/2022 compared to the previous quarter (Q4/2021),” GaStat said in its flash estimate. “This increase was due to the positive growth in oil activities by 2.9%, non-oil activities increased by 2.5%, while government services activities decreased by 0.9%.

 

Business confidence rose sharply in the kingdom on the back of rising demand, and greater economic activity.

The latest PMI data from S&P Global shows non-oil business conditions across Saudi Arabia remained in a strong position in April, with output and new orders rising sharply, resulting in increased efforts to purchase new inputs. Indeed, purchasing activity and inventories both rose at the sharpest rate since December 2017, as firms sought to build stocks in the face of rising material prices.

“Output levels continued to rise strongly at the start of the second quarter of the year, which firms widely attributed to robust growth in new client orders,” according to S&P Global.

Despite falling to its lowest since January, the expansion in output was also broadly in line with the average seen in the first quarter of 2022. Similarly, new business inflows rose at a marked, but slower pace, with rises in both domestic and foreign orders registered in April, the research firm noted.

"The Saudi Arabia PMI signalled another strong improvement in the health of the non-oil sector in April, but one that also showed the first signs of price pressures swaying clients' spending decisions,” said David Owen, economist at S&P Global. “The rate of new order growth was the softest recorded since January, as some panellists indicated a drop in sales due to recent increases in charges.

However, like the rest of the world, higher inflation and higher commodity prices could dampen sales in the coming months.

Business confidence in future activity levels was down to a three-month low and one of the lowest ever recorded, indicating a marked degree of uncertainty over whether the current rate of output growth can be sustained,” Owen noted.

HIGHER INTEREST RATES

The US Federal Reserve has decided to raise interest rates by 50 basis points, and signalled an intention to soon reduce its balance sheet by USD 9 trillion. The target range is now set at 0.75% to 1.00%. The Fed also noted that "ongoing increases in the target range will be appropriate", as high inflation reflects "broader price pressures" along with the usual supply-side culprits.

The Fed warned that it will be "highly attentive to inflation risks", and thus is not ruling out a bigger move next time, though likely only if inflation continues to surprise to the high side.

On cue, inflation in the US surged to 8.3% in April compared to the same period last year, on higher energy and food costs.

In tandem with the Fed move, the Saudi Central Bank (SAMA) and a number of other GCC central banks also raised their interest rates.

“In line with the Saudi Central Bank's objective of maintaining monetary and financial stability, the Saudi Central Bank has decided to raise the repurchase agreement (repo) rate by 0.5% to 1.75% from a previous 1.25%, and the reverse repurchase agreement (reverse repo) rate by 0.5% to 1.25% from a previous 0.75%,” SAMA noted.

Indeed, inflation is emerging as a global concern. The kingdom’s consumer price index (CPI) rose 2% in March, compared to the same period last year.

“Transport prices increased by 4.7%, due to the increase in gasoline prices by 14.7%, as well as prices for new cars (+4.0%),” according to GaStat. “Transport prices were the main driver of the inflation rate in March 2022 due to their high relative importance in the Saudi consumer basket (with a weight of 13.0%).”

Food and beverages prices also rose 3%, as food prices increased by 3.3%. In particular, meat prices were up 2.4%, while the cost of vegetables jumped by 9.4%.