Real gross domestic product (output after accounting for inflation) grew by 1.3% in 2024 compared to -0.8% in 2023. The non-oil sector grew by 3.9%, broadly unchanged from 2023, while oil GDP declined by 4.5% (9% decline in 2023) due to the continued oil production cuts under the OPEC+ agreement. Private consumption, which had been one of the main drivers of growth during 2023, slowed in the first three quarters of 2024, but private investment strengthened after a notable slowing in the second half of 2023. Government spending also contributed strongly to growth through the first three quarters of 2024.

Real GDP growth in 2025 is likely to be stronger than it was in 2024. Given the current outlook for oil production and government spending, real GDP growth of 3% in 2025 looks to be a reasonable central forecast. This assumes that real oil GDP will grow by around 1.3% as OPEC+ is able to restore some of the production it has cut in recent years to the market but cannot fully meet its announced production increases. Non-oil GDP is projected to grow by 3.5% on the assumption that the government sticks to its plan to cut spending this year, as outlined in the 2025 budget, while the Public Investment Fund continues to invest heavily in the domestic economy.

Trump’s Policies and the Saudi Economy

The first two weeks of the administration of President Donald J. Trump has seen a slew of policy announcements, a flurry of executive orders, numerous legal challenges, and constant media commentary from the president. While it is still too early to know how Trump’s policies will affect the economy, U.S. policies pose both upside and downside risks to the Saudi outlook. Three areas will be particularly important for the Saudi economy.

The Oil Market

The Trump administration will implement policies that are favorable to the U.S. oil industry. Over time, these policies will likely boost U.S. oil output, although experts disagree by how much. The president is also pushing Saudi Arabia and OPEC to lower oil prices, as he seeks to make good on his promise to reduce the cost of living in the United States. In the near term, however, the administration’s approach to sanctions on Iran and Russia will likely have the biggest impact on the global oil market and ultimately Saudi Arabia. Oil prices rose in the first few weeks of the year as the administration of former President Joseph R. Biden Jr. tightened sanctions on Russian oil exports (and cold weather hit the United States and Europe).

Trump’s approach to Iran is not entirely clear at this stage. While the White House has released a presidential memorandum directing a “maximum pressure” campaign on Iran, including through driving “Iran’s export of oil to zero,” the president has also said that he wants to negotiate a “nuclear peace agreement” with Iran. A tightening of sanctions on Iranian oil exports would reduce supply to the global oil market, particularly affecting China, which is the destination for most Iranian oil. Lower Iranian supply would make it easier for OPEC+ to increase supply during 2025 as planned, with benefits to Saudi growth and fiscal and external balances. In the absence of sanctions, however, the underlying demand and supply outlook in the global oil market does not look favorable for OPEC+ producers. The average of the latest forecasts from the Energy Information Administration, the International Energy Agency, and OPEC suggests that increased supply from non-OPEC+ countries will be sufficient to meet global oil demand growth in 2025. In this environment, it would be challenging for OPEC+ to increase production without risking a sharp drop in prices. In turn, this presents a downside risk to the Saudi growth outlook, one that could be heightened if a trade war slows global growth and the demand for oil.

Inflation and Interest Rates

Three Trump policies – tariffs, a crackdown on illegal immigration, and tax cuts – could all put upward pressure on inflation in the United States. The U.S. Federal Reserve recently noted in a statement after its January policy meeting that “inflation remains somewhat elevated” and held its policy interest rates unchanged (ending three successive meetings in which it had cut rates). An uptick in inflation would reduce the Federal Reserve’s scope for cutting interest rates and could mean that monetary policy will need to start tightening later this year. This would put Chairman Jerome H. Powell and his colleagues in a very difficult position given Trump’s demands for lower interest rates.

Any increase in policy interest rates in the United States would make borrowing more expensive at a time when the Saudi public sector is continuing to borrow heavily to fund the ambitious Vision 2030 projects. Also, higher interest rates would raise borrowing costs for individuals and businesses, potentially slowing private consumption and investment, although these links are hard to identify empirically in Saudi Arabia and the Gulf. Last, in a higher interest rate environment, the dollar, to which the Saudi riyal is pegged, may continue to strengthen, hurting the competitiveness of emerging Saudi sectors, such as tourism.

Foreign Trade and Investment

The outcome of Trump’s threats to impose new tariffs on trading partners is not yet clear. Announced tariffs on Canada and Mexico have been delayed 30 days, while those on China are going ahead. The president has also said that tariffs on the European Union “will definitely happen.” Any tariffs imposed by the United States will draw responses from affected countries and will raise the risk of an escalating trade war with negative implications for global growth. Even the uncertainty that is being created by current policies is likely to undermine investment, employment, and growth.

Such a situation may open new opportunities for Saudi Arabia but would also have costs. For example, Canada is a significant exporter of chemical products to the United States, so tariffs on Canadian imports could offer opportunities for Saudi chemical companies to expand their market in the United States. Tariffs on oil imports from Canada would raise the cost of energy in the United States but seem unlikely, at least in the near term, to result in any switching of supply sources given existing pipeline and rail transportation infrastructure and refinery needs. Higher tariffs, however, could reduce the incentives for companies to produce overseas and therefore negatively affect the foreign direct investment flows that Saudi Arabia is trying to attract to help diversify its economy.

Trump is also pushing for increased investments and purchases from Saudi Arabia to help boost the U.S. economy. The Saudi crown prince recently committed Saudi Arabia to broaden trade and investment with the United States to the tune of $600 billion over the next four years. While this looks to be an implausibly large number, a deepening of trade and investment ties is likely. How this will be financed is not clear. An increased focus on investments in the United States could well provide good long-term returns but may come at the cost of less investment in the domestic economy in the short term with an impact on growth. Further, the push by the president for lower oil prices will make it harder for Saudi Arabia to increase trade and investment with the United States, given the implications this would have for oil revenue and the fiscal and current account balances.

An Uncertain Year

The Saudi economy has entered 2025 in good shape. The non-oil economy is growing strongly, inflation is contained, and the unemployment rate is near a record low. However, there are uncertainties emanating from the United States that could affect the Saudi economy this year. The impact of U.S. policies on the global oil market, inflation and monetary policy, and trade and investment are among the most important. More so than usual, what happens in the United States will be of central importance for the Saudi economy this year.