Saudi economy shrinks most since 2020 as war roils oil exports

Saudi Arabia’s economy saw its sharpest quarterly contraction since the Covid-19 pandemic, as the US-Israeli war against Iran poses challenges to the vital oil industry.

Gross domestic product shrank 4.8% year-on-year in the three months through June, according to preliminary data from the General Authority for Statistics on Thursday. That compares with growth of 3% in the first quarter.

The contraction was driven by an 24.7% decline in the oil sector, versus 2.9% growth in the first quarter. Non-oil activity, a focus for authorities as they attempt to reposition the economy, expanded 0.6% compared with 2.9% last quarter.

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The figures highlight the pressures months of war between the US and Iran are placing on the Middle East’s largest economy, with no sign of a definitive peace deal on the horizon. At various stages of the conflict, Tehran has struck US allies across the Persian Gulf, including Saudi Arabian energy facilities.

The crisis has effectively blocked for weeks at a time the Strait of Hormuz, the Gulf choke point through which a fifth of the world’s oil once transited. Saudi exports via the route resumed in June after a preliminary US-Iran peace deal, only to face renewed Iranian threats when the ceasefire unraveled this month.

The world’s largest oil exporter has enacted a workaround, redirecting crude flows via a pipeline to the Red Sea port of Yanbu that offers another exit route to global markets. A fresh threat to Saudi ports and shipping from Iran-backed Houthi rebels in neighbouring Yemen has now added risks there too.

Saudi oil production levels remain below prewar rates, although the kingdom has partially benefited from spikes in the price of crude, which reached $92.7 a barrel on Thursday.

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The International Monetary Fund said Saudi Arabia was “showing agility and resilience,” reflecting the kingdom’s “strong macroeconomic fundamentals and diversified oil and logistics infrastructure.”

A recovery is expected to take hold when maritime traffic through the Strait of Hormuz gradually returns to normal, the Washington-based lender said in a statement on Wednesday. It expects Saudi economic growth to slow to 1.7% in 2026, before accelerating to 5.5% the following year.

Over the medium-term, growth will be supported by “buoyant consumption and investment, including government-led projects and major international events, and by sustained structural reforms under Vision 2030,” said the IMF.

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