After the oil decision… Expectations of a contraction of the Saudi economy

2023-06-05 17:56:22

Research firm Capital Economics expects the Saudi economy to shrink 0.5 percent this year following its decision, Sunday, to cut oil production.

The research firm had previously predicted Saudi Arabia’s gross domestic product would grow by 1 percent this year.

The Saudi Energy Ministry said on Sunday that the kingdom would cut its oil production to 9 million barrels per day in July from regarding 10 million in May, the biggest cut in years as Riyadh and other producers try to prop up anemic oil prices.

Despite the production cuts, Capital Economics expects the kingdom to achieve a budget surplus this year. And you see that the breakeven oil price is $80 a barrel. Brent crude recorded regarding $76.8 a barrel on Monday.

“We left our year-end Brent price forecast unchanged at $90 a barrel for the end of 2023, and those prices just might get a little bit higher in the meantime than we expected,” said James Swanston, emerging markets economist at Capital Economics.

Combined with the global financial crisis and the COVID-19 pandemic, the GDP contraction “will be the weakest pace of growth in the past 20 years,” Capital Economics said in a research note.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that if the production cuts continue from July to the end of 2023, it will lead to a contraction of gross domestic product.

“We see that if the oil production cut of one million barrels per day continues only in July, this will reduce the real GDP growth of Saudi Arabia by 0.3 percentage points. But if it is extended for the rest of the year, that is, from July to December, then we believe that this will reduce GDP growth.” The main total for the Kingdom by regarding 2.0 percentage points.

Malik had previously predicted a 1 percent growth in Saudi Arabia’s gross domestic product in 2023 and a financial breakeven oil price of $86.3 a barrel.

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