(Adds Q1 data, seasonally-adjusted Q2 data)
By Davide Barbuscia and Alexander Cornwell
DUBAI, Sept 30 (Reuters) - Saudi Arabia’s economy slowed sharply in the second quarter amid oil output cuts by the world’s largest crude exporter, government data showed on Monday, raising fears of an economic contraction this year.
The economy grew by 0.5% in the second quarter from a year earlier, down from annual growth of 1.66% in the first quarter of 2019.
It last contracted in 2017 before recovering to 2.2% growth last year, helped by strong oil output.
The biggest Arab economy, Saudi Arabia is seeking investment to diversify away from oil, but suffered a blow on Monday when rating agency Fitch downgraded its credit rating.
“The deceleration in real headline GDP growth was expected, with the oil sector contracting as Saudi Arabia restrained oil output to support the price,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, who expects 0.1% contraction this year. The second-quarter data showed oil sector GDP declined 3.02%, while the non-oil sector grew 2.94% in the quarter, government data showed.
The latest data came as Fitch cut Saudi Arabia’s credit rating to A from A+, citing a deterioration of the kingdom’s fiscal position and rising geopolitical and military tensions in the Gulf after an attack on its oil facilities.
Saudi Arabia has also restrained crude production by more than called for by an OPEC-led supply deal to support oil markets, which prompted some economists to predict little growth or contraction earlier this month.
But ADCB’s Malik said the encouraging aspect of the data was the strengthening in real non-oil activity, with the data pointing to a further pickup in investment.
The growth was fueled by the private sector activity, supported by the country’s sovereign fund, the Public Investment Fund, which is backing some of the country’s biggest infrastructure projects.
Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note the breakdown of the data showed that the slowdown between the first quarter and second quarter was driven by cuts in oil production.
Having recorded growth of 1.0% year-on-year in the first quarter, output in the oil sector contracted in the second quarter, he said.
“In short, the Saudi economy is now officially in recession,” said Tuvey.
On a seasonally-adjusted basis, the Saudi economy contracted by 0.64% from the first quarter, Monday’s data showed.
Rating agency S&P said on Friday it expects real Saudi GDP to contract by about 0.4% this year, driven mainly by a fall in oil production tied to the OPEC deal and the attacks.
The projection came after Moody’s earlier cut its forecast for Saudi economic growth in 2019 to 0.3% from its previous projection of 1.5% as it expects lower oil output. (Writing by Saeed Azhar; Editing by Toby Chopra)