When the first official estimate of 2023 real gross domestic product is published by the Saudi statistical authority at the end of January, it is likely to show that the economy contracted by around 0.5% relative to 2022. This is due to real oil gross domestic product, which is likely to have fallen by around 7% due to the large cuts in crude oil production in May and July 2023. The non-oil economy is likely to have grown by a healthy 4%, driven by private consumption as households continued to take advantage of new spending opportunities in sectors such as entertainment and tourism. Together with ongoing labor market reforms, this non-oil growth led to significant new job creation, and the Saudi unemployment rate fell to 8.6% in the third quarter of 2023 from 9.9% a year earlier. Nevertheless, two concerns are apparent in the recent data. First, the non-oil economy lost steam as the year progressed, with year-on-year growth in the third quarter of 2023 at its weakest since the coronavirus pandemic. Second, investment spending, which is key to boosting productivity and supporting diversification, slowed sharply during 2023.

Stronger Growth Expected in 2024

As forecasters make their projections for the Saudi economy in 2024, they will have to assess whether the slowdown in non-oil growth and investment spending is temporary or longer lasting. They will also have to weigh the potential impact of several global, regional, and domestic uncertainties that could significantly affect the economy; the biggest relate to the global oil market, the ongoing conflict in Gaza, U.S. monetary policy, and the impact of domestic reforms.

• The Outlook in the Global Oil Market

Oil production outside the OPEC+ group is surging, with U.S. crude oil output reaching record levels in recent months. This increase in production has pressured oil prices and led OPEC+, particularly Saudi Arabia, to cut production to support prices. Saudi Arabia has already announced that it will extend its oil production cuts through the end of the first quarter of 2024. The path of oil production thereafter is difficult to call. OPEC is projecting only a modest increase in demand for its crude in 2024 as increasing non-OPEC supply meets most of the projected increase in demand. This means that the most likely scenario is that Saudi Arabia can only gradually restore a modest amount of the production it cut during 2023 without undermining oil prices.

However, the balance of demand and supply in the global oil market can change quickly. For example, in its May 2023 Middle East and Central Asia Regional Economic Outlook, the International Monetary Fund projected 2023 Saudi oil production to average 10.5 mb/d. The actual outcome is likely to be 9.6 mb/d, showing how quickly the market can shift. In 2024, a stronger-than-expected global economy or non-OPEC+ supply falling short of expectations could result in increased demand for Saudi crude and consequently stronger growth in real oil GDP. Higher oil revenue would also likely lead to an increase in government spending, which would provide a short-term boost to non-oil growth. On the other hand, continued strong growth in non-OPEC+ supply or the failure of some OPEC+ countries to stick to their announced production cuts could pressure Saudi Arabia to further restrain production or face lower oil prices, with negative implications for oil and non-oil growth.

• The Conflict in Gaza

The conflict in Gaza, particularly if it escalates or expands, may dent confidence of Saudi businesses and households, affecting investment and consumption spending, and hold back tourist arrivals and foreign direct investment given broader regional uncertainties. Impediments to oil shipments would lead to oil price increases, at least temporarily, with oil exports being negatively affected.

• U.S. Monetary Policy

The U.S. Federal Reserve is expected to begin cutting policy interest rates in 2024 as inflation continues to decline toward its 2% target. Lower U.S. policy rates would transmit to lower rates in Saudi Arabia given the riyal is pegged to the U.S. dollar. While empirical studies have struggled to find a relationship between interest rates and growth in Saudi Arabia, particularly when oil prices are relatively high, it is likely that this relationship will strengthen over time as the financial sector continues to develop. If the Federal Reserve moves to cut interest rates before other major central banks, this may also weaken the U.S. dollar (and riyal) and provide a modest boost to the competitiveness of non-oil exports.

While expectations are firmly set that the Federal Reserve will cut interest rates, the timing and pace of such cuts are a matter of conjecture and will ultimately be determined by the path of inflation. The timing and extent of monetary easing will not only be important directly for the domestic economy but perhaps even more important for global growth and the demand for oil.

• Saudi Fiscal Policy

The Saudi budget indicates that fiscal policy will provide less support to the economy in 2024 than during the previous two years during which government spending increased by over 20%. Even allowing for a further increase in spending by the Public Investment Fund in 2024, some overrun on the central government spending levels announced in the budget, and the lags with which government spending can affect growth, the boost to the non-oil economy from fiscal policy in 2024 is likely to be less than half that in 2023.

• Impact of Reforms

Saudi Arabia has undertaken significant reforms to strengthen legal and regulatory frameworks, develop new sectors of the economy, deepen financial markets, encourage foreign investment, and increase the participation of Saudi women in the labor market. Analysis by the IMF indicates that these types of reforms should boost growth in the non-oil sector. It seems reasonable to assume there will be some positive effect from these reforms in 2024, but it is difficult to predict the size. New reforms, such as the Regional Headquarters Program, are also being implemented in 2024, although it is uncertain what their impact will be.

A reasonable central scenario is for real GDP to grow by 1.5% in 2024. If oil production increases to 9.5 million barrels per day by the end of the year, this would be consistent with a decline in real oil GDP of around 2%. If monetary policy eases and structural reform efforts bear fruit, including through increased foreign direct investment and tourist arrivals, then the non-oil sector could expand by 3% to 4% despite less support from fiscal policy and the possibility of lower oil prices (the average price for Brent was $83 per barrel in 2023; the December 2024 Brent futures contract is currently pricing around $74/bbl).

Meeting Growth Ambitions

While 2024 is unlikely to see the high growth in the non-oil sector that is being sought under Vision 2030, a 3% to 4% expansion would still represent a favorable outcome, particularly if accompanied by a further decline in unemployment, given the difficult global backdrop and the need to rein in government spending.

Indeed, it is important to be realistic about what is a sustainable rate of non-oil growth. The IMF recently suggested that medium-term “potential” non-oil growth, i.e., the rate of growth consistent with stable inflation, is 4%. Attempting to systematically boost growth above this rate would likely result in higher inflation or a deterioration in the current account position. Achieving stronger non-oil growth will ultimately depend on increasing the productivity of the Saudi economy, through efficient investments in human capital, traditional and digital infrastructure, and higher-tech industry, and continuing ongoing efforts to increase the participation of Saudi nationals, particularly women, in the labor market.