The Saudi economy is experiencing a period of robust growth driven by high oil prices, increased private investment, and the implementation of reforms. This has led to a decade-high surplus in the current account and controlled inflation. However, uncertainties in the global economy, affecting financial conditions and oil prices, highlight the need for continued efforts to strengthen buffers and diversify the economy. The future focus should be on fiscal reforms, carefully calibrated investment programs, and the implementation of structural reforms to promote sustainable and inclusive growth.
Growth
Recent economic developments show that Saudi Arabia had the highest growth rate among G20 economies in 2022, with overall growth reaching 8.7%. This growth was fuelled by strong oil production and a 4.8% expansion in non-oil GDP, driven by robust private consumption and investment, including large-scale projects. Key drivers of non-oil growth were wholesale and retail trade, construction, and transportation. The output gap closed in 2022, and the positive momentum is expected to continue in 2023, with estimates suggesting non-oil growth above 5% in the first half of the year.
Unemployment
The unemployment rate in Saudi Arabia is at a historical low, dropping to 4.8% by the end of 2022 compared to 9% during the COVID-19 pandemic. This decline is attributed to increased labor force participation, including Saudi workers in the private sector and expatriate workers in sectors such as construction and agriculture. Over the past two years, youth unemployment was halved to 16%, and female labor force participation reached 36% in 2022, surpassing the target of 30% set under Vision 2030.
Consumer Price Index
Despite the strong economic activity, inflation remains low and seems to be easing. The average Consumer Price Index (CPI) grew by 2.5% year-on-year in 2022, thanks in part to domestic subsidies and price caps, as well as the strength of the US dollar. Although there was a temporary uptick in early 2023 to 3.4% year-on-year, headline inflation has returned to 2.7% year-on-year in April 2023, driven by declining contributions from transport and food prices, offsetting the significant increase in rent. There has been some wage pressure observed for low-skilled and highly specialized workers, but average wages have remained stable.
Current Surplus
The current account surplus improved significantly in 2022, reaching a surplus of 13.6% of GDP, the highest in a decade, due to higher oil prices and increased oil production. However, this surplus did not result in a corresponding increase in official reserves due to the large accumulation of assets abroad. Reserves fell by $30 billion in April 2023 compared to 2022 but remain at comfortable levels, providing around 20 months of import cover.
Prospects
The economic prospects for Saudi Arabia are positive, with strong momentum expected to continue in non-oil sectors. Although OPEC+ production cuts in April 2023 will reduce overall real growth to 2.1% for the year, non-oil growth is projected to average 5% in 2023, driven by strong consumption spending and accelerated project implementation. Headline inflation is expected to remain contained in 2023, with an average CPI of 2.8%, slightly higher than in 2022, as factors such as a strong currency, subsidies, and price caps offset inflationary pressures.
The significant improvement in the current account is expected to moderate as oil prices stabilize and imports increase, supported by a substantial investment program. Reserves are projected to stabilize at slightly lower levels of import coverage in the medium term, but they will remain well above standard reserve adequacy metrics.
The risks to the economic outlook are balanced. On the upside, higher oil prices, potential changes in OPEC+ oil production cuts, and accelerated structural reforms and investment could spur further growth. However, there is a concern that a rapid rise in non-oil investment could lead to increased domestic demand, putting pressure on prices and external accounts. On the downside, lower oil prices due to subdued global activity represent a short-term risk, while a quicker shift in demand for fossil fuels could hamper growth in the medium to long term.