Saudi consumption to slow as austerity bites, says CE

Saudi household consumption is expected to grow at a slower pace over the coming years in the face of fiscal austerity, Capital Economics said in a recent note.

“We expect Saudi consumer spending growth to settle at rates of around 2-3 percent over the coming years, well below those of 6-7 percent recorded in the past decade.”

Fiscal austerity was the main driver of the slowdown in household consumption last year and the government’s decision in late-September to slash bonuses for public sector workers can probably explain the continued weakness of consumer spending at the start of this year, the note said.

Last September, the kingdom canceled bonus for state employees and cut ministers salaries by 20 percent, as it took steps to shore up its finances.

But the note also said that “low-level indicators suggest that the worst may now be over” for household spending.

“While the worst of the slowdown in consumer spending is probably now over, the outlook is still fairly bleak,” it explained.

Capital Economics also expected that household spending will be badly affected by a fresh subsidy cuts and value-added tax.

“Fresh subsidy cuts are scheduled for the middle of this year and only the poorest households will be fully shielded from these via the introduction of a “household allowance”. The imposition of a value-added tax in 2018 will further add to price pressures, eroding consumers’ purchasing power.