Saudi Arabia’s economy contracted sharply in the second quarter of 2026 as disrupted crude production and exports outweighed continued, though much weaker, growth across non-oil industries.Real gross domestic product fell 4.8 per cent from a year earlier, reversing the 2.8 per cent expansion recorded during the first quarter. Oil activities declined 24.7 per cent, while non-oil activities increased 0.6 per cent, showing that diversification continued to provide limited support during an exceptionally severe energy-sector downturn.
The figures mark the kingdom’s steepest annual economic contraction since the coronavirus pandemic and illustrate how heavily headline growth remains linked to crude production, maritime access and energy exports. Saudi Arabia has spent heavily on tourism, technology, logistics, entertainment, manufacturing and construction, but hydrocarbons still exert an outsized influence on overall output, public revenue and external trade.
Oil activity was hit by constraints on shipping through the Strait of Hormuz and wider disruptions linked to the Middle East conflict. The kingdom redirected some crude through the East-West pipeline to Red Sea terminals and drew on overseas inventories, limiting the reduction in deliveries. Those measures could not fully compensate for lower production and restricted access to traditional export routes.
The second-quarter decline contrasts with the same period of 2025, when real GDP expanded 3.9 per cent. Oil activities then grew 3.8 per cent and non-oil activities rose 4.6 per cent, supported by trade, financial services, utilities and business activity. The reversal highlights the speed at which geopolitical disruption has altered the kingdom’s growth trajectory.
Non-oil growth of 0.6 per cent offered some evidence of resilience, but it was far below the rates recorded before the escalation in regional tensions. Higher freight charges, insurance costs, supply delays and weaker investor confidence have affected businesses that depend on imported equipment, overseas customers or cross-border transport.
Private-sector surveys nevertheless showed an improvement towards the end of the quarter. The Riyad Bank Saudi Arabia Purchasing Managers’ Index rose to 53.3 in June from 52.8 in May, its highest level since February and its third consecutive reading above the 50-point threshold separating expansion from contraction.
Output and new orders strengthened, supported mainly by domestic demand, while business expectations improved to a five-month high. Export orders remained under pressure for a fourth month, reflecting supply-chain disruption, transport difficulties and greater competition in foreign markets. Input costs also accelerated because of higher fuel, freight and supplier charges, prompting companies to raise selling prices.
The divergence between stronger survey activity in June and weak quarterly GDP suggests that conditions began stabilising after a difficult start to the period. The recovery remained uneven, however, with employment broadly unchanged and manufacturers continuing to face external demand and logistics problems.
Saudi Arabia entered 2026 after expanding 4.5 per cent last year, helped by the easing of OPEC+ production restraints and strong domestic spending. Inflation had fallen below 2 per cent, the banking system remained well capitalised and major Vision 2030 projects continued to support construction and services.
Economic expectations have since been revised lower. Growth for 2026 is now expected to be substantially weaker than forecasts issued before the conflict, although higher oil prices may partly offset the loss of export volumes and ease pressure on the fiscal and current-account balances.
Government finances retain important buffers, including comparatively low public debt, foreign reserves and assets controlled by the Public Investment Fund. These resources give Riyadh room to maintain priority projects and support businesses affected by trade interruptions, but prolonged disruption would increase pressure to delay spending, raise borrowing or reassess the pace of large developments.
The oil contraction also reinforces the strategic importance of expanding the private sector beyond government-led projects. Tourism, aviation, mining, renewable energy, digital services and advanced manufacturing remain central to Vision 2030, which aims to create employment, attract foreign capital and reduce dependence on petroleum income.
Policymakers face the challenge of protecting that programme while managing higher defence, transport and financing costs. Spending may increasingly be directed towards projects offering faster economic returns, stronger private investment or direct improvements to logistical resilience.
Topics
Saudi Arabia