Saudi Arabia's Economy Surges 3.4% in Q1 2025, Driven by Non-Oil Sector Growth

Saudi Arabia's economy expanded by 3.4% year-on-year in the first quarter of 2025, surpassing initial projections of 2.7%. This growth was primarily driven by a slower decline in the oil sector and a robust expansion in the non-oil sector, which grew by 4.9% year-on-year. The oil sector, which had been expected to decline by 1.4%, actually saw a more modest decrease of 0.5%.

The non-oil sector's performance was particularly noteworthy, as it has been a key driver of Saudi Arabia's economic growth in recent years. This sector's expansion was supported by various initiatives and reforms aimed at diversifying the economy away from its traditional reliance on oil. The Saudi government has implemented measures to attract foreign investment, including easing regulations, improving the business environment, and offering incentives to investors. These efforts have helped to create a more favorable environment for businesses, leading to increased investment and job creation.

Despite the positive economic indicators, the Saudi economy faces challenges due to the global energy transition. The oil sector, while still a significant contributor to the economy, has seen a decline in recent years as the world shifts towards renewable energy sources. However, the Saudi government has been proactive in managing this transition, investing in downstream oil and gas projects and exploring new opportunities in the energy sector. The country's vast reserves and advanced infrastructure have positioned it well to navigate the challenges posed by the global energy transition.

The Saudi government has also been focusing on implementing its Vision 2030 initiative, which aims to reduce the kingdom's reliance on oil and develop public service sectors such as health, education, infrastructure, recreation, and tourism. These efforts have contributed to the robust growth in the non-oil sector. The government has confirmed its commitment to hosting major international events, including the 2029 Asian Winter Games and the 2034 FIFA World Cup, which will require significant infrastructure investments and further boost public spending.

However, the recent decline in oil prices has added to fiscal pressures. The International Monetary Fund has indicated that Saudi Arabia needs oil prices to remain above 90 dollars per barrel to maintain fiscal balance, but current prices are around 60 dollars per barrel. In response, the Saudi government has adjusted its export pricing strategy and agreed with OPEC+ members to increase oil supply by 41.1 thousand barrels per day starting in July. This move is part of a broader strategy to manage the impact of lower oil prices on the economy.

Looking ahead, analysts expect the Saudi government to tighten spending to control the fiscal deficit, which could put some pressure on the non-oil sector's growth. However, the ongoing construction of large-scale development projects is expected to continue supporting economic growth in 2025 and 2026. The government's commitment to these projects, along with its efforts to diversify the economy, positions Saudi Arabia well for sustainable economic growth in the coming years.