GLOBAL AND LOCAL ECONOMY OVERVIEW
The global pandemic caused a historic crisis, affecting the resources of health care systems around the world and resulting in the loss of more than two million human lives .The unprecedented economic downturn has led to a recession unparalleled since the depression of the 1930s. According to International Monetary Fund (IMF) estimates for 2020, the global economy shrank by 3.5%. Governments around the world have taken unprecedented financial rescue measures and major central banks have cut interest rates to near zero while on the other hand, they injected substantial amounts of liquidity to support their economies. In response to the pandemic, total financial support, according to IMF calculations, has reached about 12% of global GDP. As a result, it is estimated that the global public debt reached 100% GDP in 2020.
According to the latest IMF estimates in 2020, the US economy contracted by 3.4%, which can be explained by the economic downturn through a strong and sustained recovery in the second half of 2020 after a massive contraction in the second quarter of the year. While consumer spending during the third quarter recovered rapidly, additional support came from the housing sector and construction activities as well.
European economies have been hit hard during the year under review. In Europe, the IMF estimates that the economic contraction will be 7.2% and in the UK 10%. As many European countries imposed complete quarantines in the early stages of the pandemic, it had a major impact on economic activity in the second quarter of the year. However, after the gradual relaxation of these measures and a strong recovery in the third quarter, the outbreak of the second and third waves of the pandemic forced many European countries to impose partial quarantine, which led to a reversal of negative growth in the last quarter of the year.
China is expected to be the only country that enjoyed positive economic growth in 2020. After a recession in the first quarter as a result of the pandemic, the economy received a boost in infrastructure and real estate and in exports and domestic demand. The IMF estimates that China’s economic growth will be 2.3% in 2020. In contrast, the Indian economy has been severely affected by the pandemic, with economic activity declining by 8% in 2020 according to the IMF. There was a significant contraction in all sectors except agricultural production.
The IMF also forecasts that the global economy will recover to record a growth of 5.5% in 2021. This can be explained by the combination of strong financial and monetary support in major economies and the launch of new vaccines during 2021, which were developed in a remarkably short period of time. Global growth is expected to gradually slow down to 4.2% in 2022.
Economies of the Gulf Cooperation Council countries
GCC countries faced the dual impact of the pandemic and the sharp decline in oil prices at the same time. Governments have implemented a range of measures to mitigate the impact of the pandemic, including fiscal measures, monetary easing and injecting liquidity into the banking system. Because the pandemic was the cause of the decline in oil prices due to the unprecedented collapse in global demand, activities of many of the petroleum industries have been curtailed.
The Saudi economy has been affected by lower oil prices and lower production of crude oil in addition to the decrease in non-oil economic activity due to the impact of the COVID-19 pandemic, as is the case with the rest of the Middle East countries. The total quarantine imposed during the second quarter slowed the growth of the non-oil economy in particular. The non-oil economy also contracted by 8.2% in the second quarter compared to the previous year. Of the key sectors, wholesale and retail trade, as well as transportation, warehousing and communications, took a particularly heavy hit in the second quarter, while financial services, insurance and business turned out to only show a marginal slowdown. On the other hand, there was a noticeable recovery during the third quarter, mainly due to the easing of closures and pent-up demand. The GDP growth of the non-oil economy showed a marked improvement to -2.1% year-on-year.
The Saudi government and the Saudi Central Bank have responded swiftly to the outbreak. The financial package to support the private sector in particular included exemptions to the value of SAR 120 Bn. of various administrative fees, the postponement of value-added tax and Zakat tax, as well as paying 60% of the salaries of Saudis in companies affected by the pandemic and reallocating SAR 47 Bn. within the budget to the sector. In addition the health sector would see upgrades to infrastructure pertaining to the pandemic. In order to increase borrowing, the Government debt ceiling was raised from 30% to 50% of GDP while in order to enhance sustainable fiscal financing sources, the value-added tax rate was increased from 5% to 15% by July.
At the same time, the Saudi Central Bank provided support to the financial sector by pumping SAR 50 Bn. in interest-free deposits in addition to about SAR 80 Bn. through dedicated private sector financing support programs that focus specifically on the small and medium-sized enterprises sector. The support measures implemented by the Central Bank included sufficient liquidity in the financial system during the crisis period and during the recovery phase of the Saudi economy.
Oil prices fell sharply in the spring due to the outbreak of the pandemic, with Brent crude reaching USD 19 in mid-April after the year started at USD 0.66. As a result of the gradual improvement in global demand and the historic agreement to cut production by OPEC+, oil prices began to improve during the month of May. Positive news related to the development of new vaccines against the COVID-19 virus in November resulted in this improvement as well as the rise in Brent prices to USD 52 at the end of the year.
The Kingdom of Saudi Arabia also reduced its crude oil production from 9.7 million barrels per day at the beginning of 2020 to 9.0 million barrels per day in December, based on the OPEC + production cut agreement. For the year under review as a whole, oil production fell by 6% compared to the previous year.
This decrease in production has translated into a negative contribution in return, with the growth of the GDP of the oil sector in 2020. The Saudi economic growth is estimated to slow down by 3.9% for the year 2020, according to the Economic Outlook Update, January 2021 of the IMF.
We also expect a significant recovery in 2021, which is likely to continue into 2022. The IMF forecasts a growth rate of 2.6% for the Saudi economy in 2021 followed by 4% the following year. For the global economy in general, recovery depends on the extent of the virus spread and the launch of successful vaccines in 2021.