(MENAFN - Arab Times) KFH-Research issed a report about the Saudi economy, and said that it witnessed significant growth in Q3 of 2012 after a slowdown in the previous two quarters. This growth was triggered by a drastic increase in governmental services sector. The Saudi economy grew by 5.9% y-o-y basis during Q3 of 2012.
The report highlighted the positive role played by the government to support the economy through good financial positions, and abundant expenditure that boosted the constructions and transportation sectors. The GDP for 2012 is expected to be 6% y-o-y.
Saudi's economic growth picked up in 3Q12 to 5.9% y-o-y from 5.5% y-o-y in 2Q12, led by strong expansion in the government sector. The uplift in the rate of real GDP growth comes after two consecutive quarters of slowing growth.
Economic growth hit a high of 7.8% y-o-y in 2Q11, after two massive fiscal giveaways were announced (including an extra month's salary for all public-sector workers). Since that time, the economy has been buttressed by a continued loose fiscal stance, as well as rapid growth in the construction and transportation sectors. This trend persisted into 3Q12, with construction growing by 8.1% y-o-y and transport by 8.7% y-o-y.
Government spending
The major driver to growth was the government services, expanding by an exceptionally rapid rate at 13.4% y-o-y in 3Q12 from 2.2% y-o-y in 2Q12. The reason behind this sharp climb is not clear, especially as the holy month of Ramadan would have been expected to depress government activity that quarter and is likely to be one-off.
It also helped mask a relatively modest performance by the private sector, which grew by 5.1% (compared with a y-o-y average of 6.4% in 1H12). This may well have stemmed from a sharp slowdown in manufacturing to 2.5% y-o-y in 3Q12 from 6.9% y-o-y in 2Q12, a trend seen across the emerging world as global trade growth declined.
Nevertheless, the expansionary fiscal stance is likely to continue to provide opportunities for the private sector, with, for example, the on-going ramping-up of public-sector employment probably contributing to the strong performance of the wholesale and retail sector (which grew by 7.2% y-o-y in 3Q12).
Meanwhile, the mining sector, which is dominated by oil, softened to 2.1% y-o-y in 3Q12 from 6.0% y-o-y in 2Q12, although this largely reflects a less helpful base effect. Oil output was ramped up considerably in 2H11, initially to cover for the loss of Libyan output during that country's civil war, and subsequently to compensate for declines in Iranian output.
As Saudi oil output reportedly falling in November 2012 to 9.7 million bpd (October 2012: 9.8 million bpd), we would expect this weakening in the sector to continue, driving a softer real GDP growth at 5.5% y-o-y in 4Q12. At present we forecast only a small decline in oil output in 2013, to around 9.9 million bpd.
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However, if the latest OPEC Saudi output figure is confirmed, we may well reduce this forecast to 9.7 million bpd, in turn having a negative knock-on impact on our real GDP growth projection for 2013.
Non-Oil Sectors Remain Buoyant
In November 2012, Saudi's purchasing managers' index (PMI) reading eased to 57.0 from 59.8 in October 2012, indicating a strong performance of the economy's non-oil sector. Despite easing this month, the reading is well above the 50.0 neutral mark, consistent with robust expansion in business activity, in line with series average since 2009.
Both output and new orders remained high in November 2012, although the rate of expansion has eased. New export orders also continued to rise in November 2012, primarily led by growth in foreign demand from the GCC.
Level of outstanding business, however, declined for the first time in four months owing to more pending work. Jobs grew sharply, increasing for the fourteenth consecutive month with the rate of growth in employment higher than the previous month.
Input prices eased to a two-year low although average wages picked up than in October 2012. Output costs eased this month in line with moderating input costs, which suggests downside risks to inflation.
Conclusion
We retain our estimate for full-year 2012 GDP growth at 6.0% y-o-y.
