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The International Monetary Fund (IMF) downgraded its forecast for Saudi economic growth in 2026 to just 1.7%, down from 4.5% in January, but raised its forecast for 2027 to 5.5%. This gap between two consecutive years summarizes the current scene: a temporary slowdown caused by regional disturbances, followed by an expected recovery contingent on maritime traffic and exports returning to normal.
In this article, we review the latest estimates issued by international and local institutions, the reasons for their reduction, what actual official data says about economic performance up to the second quarter of 2026, and what this means for investors in the Saudi market.
How Did the 2026 Growth Forecasts Change Over Six Months?
The IMF’s 2026 growth forecasts fell three consecutive times during the first half of the year:
- January 2026: The Fund expected growth of 4.5%, a rate close to the performance of 2025.
- April 2026: Forecasts were reduced to 3.1%, after the effects of the war in the region began to appear on oil production and exports.
- July 2026: It was lowered again to 1.7% in the World Economic Outlook update, with a clear reference to the disruption of oil exports and the impact on non-oil activities such as transport, logistics, and tourism.
For comparison, the Ministry of Finance had estimated in the approved 2026 budget in December 2025 a real growth of 4.6%, driven by the expansion of non-oil activities. That is, the current estimates are more than half less than the original official estimate.
Why Did Growth Estimates Decrease?
The main reason is the war that erupted in the region in late February 2026 and the subsequent near-halt of navigation through the Strait of Hormuz. Under normal circumstances, about a fifth of global crude oil supplies pass through this strait. Vessel traffic dropped from 130-140 ships daily before the crisis to about 10 commercial ships daily in early September, according to Kpler data cited by Reuters.
The impact on Saudi Arabia was less severe than most Gulf countries, but it clearly appeared in the numbers. The Kingdom has alternative export routes via pipelines to the Red Sea, which led the IMF to describe it as one of the least affected Gulf economies. In contrast, the Fund expected the economies of Bahrain, Kuwait, and Qatar to contract in 2026. However, alternative routes do not compensate for full export capacity, so oil production declined, and with it, the Gross Domestic Product (GDP).
Besides oil, the Fund noted that the war weakened confidence and slowed non-oil activity, and expected this sector’s growth to slow to 2.6% in 2026.
What Do Official Data Say About Actual Economic Performance?
Actual figures issued by the General Authority for Statistics confirm the slowdown picture, showing that the blow was concentrated in oil.
| Period | Real GDP Growth (Annual) | Oil Activities | Non-Oil Activities | Government Activities |
|---|---|---|---|---|
| Q2 2026 | -4.7% | -24.8% | +0.9% | +0.9% |
| Q1 2026 | +3.0% | +2.9% | +2.9% | +1.5% |
| Year 2025 (IMF Estimate) | +4.6% | – | – | – |
In the first quarter of 2026, non-oil activities were the largest contributor to growth by 1.7 percentage points, with financial, insurance, and business services recording the highest growth rate at 5.4%. As for the second quarter, GDP contracted by 4.7% year-on-year due to a nearly one-quarter drop in oil activities, while non-oil activities maintained limited positive growth.
This point is important to understand the picture: the economy did not enter a comprehensive contraction. Non-oil sectors continued to grow, albeit at a much slower pace than rates that exceeded 4% in the previous year. Community, social, and personal services recorded the highest growth in the second quarter at 4.1%, followed by finance, insurance, and business services at 3.3%.
2027 Forecasts: Why is Everyone Optimistic?
Major institutions agree that 2027 will be a year of strong recovery, but they differ on its size:
| Institution | 2026 Growth Forecast | 2027 Growth Forecast | Forecast Date |
|---|---|---|---|
| International Monetary Fund (IMF) | 1.7% | 5.5% | July 2026 |
| Organization for Economic Co-operation and Development (OECD) | 3.2% | 4.3% | June 2026 |
| Riyad Capital | 0.9% | 6.8% | June 2026 |
The logic of the recovery is simple: when oil production and exports return to normal levels, the 2027 economy will compare itself to a low base in 2026, resulting in a high growth rate. Riyad Capital, for example, expects crude oil production to rise from 9.1 million barrels per day in 2026 to 10.4 million in 2027, and the oil sector to grow by 14.3% after a 3.6% contraction. It also expects the growth of non-oil activities to accelerate from 3.0% to 4.7%.
The Condition on Which the Recovery is Based
All these forecasts are conditional. The IMF based the 5.5% figure on the assumption that the Strait of Hormuz will begin reopening in mid-July 2026, and that conditions will gradually return to pre-war levels by March 2027. Riyad Capital assumed a gradual reopening starting in September 2026.
As of early September, shipping traffic had not yet recovered, meaning these assumptions are under pressure. If the disruptions are prolonged, the 2027 forecasts are likely to be revised downwards in upcoming updates. If navigation returns faster than expected, the recovery may be stronger. Therefore, it is best to read the 2027 figure as a baseline scenario, not a guaranteed outcome.
Other Indicators Worth Following
- Inflation: Remained low at 1.8% in August 2026, and the IMF expects an average of 2.2% for the full year.
- Fiscal Deficit: The Fund expects it to decline to 3.7% of GDP in 2026, compared to 5.8% in 2025.
- Investment: Despite the slowdown, investment licenses recorded a record number in the second quarter (Internal link → Article “Jump in Investment Licenses in Saudi Arabia”).
- Pre-Budget Statement for 2027: Usually issued by the Ministry of Finance at the end of September, and will carry the first updated official government estimate for growth in 2026 and 2027.
What Does This Mean for the Investor?
The current slowdown is due to an external shock that hit oil specifically, not a structural weakness in domestic demand. This distinction matters to investors in the Saudi stock market because sectors linked to domestic consumption and financial services are affected differently than companies tied to oil prices and volumes.
At the same time, the optimistic outlook for 2027 relies on a geopolitical factor that cannot be accurately predicted. A cautious investor monitors three things: navigation traffic in the Strait of Hormuz, quarterly GDP data from the General Authority for Statistics, and upcoming updates to IMF forecasts in October. To understand the role of non-oil sectors in the long term, read our article on diversifying the Saudi economy (Internal link → Article “Diversification of the Saudi Economy”).
This article is for informational purposes only and is not considered investment advice.
Sources
- International Monetary Fund – 2026 Article IV Consultations
- Arab News – 2027 forecast raised to 5.5%
- House of Saud – 2026 forecast lowered to 1.7%
- Arab News – Q2 Data
- General Authority for Statistics – Q1 2026
- IndexBox – Riyad Capital Forecasts
- Economy Middle East – Inflation and Deficit
- DataSaudi
- Arab News – 2026 Budget
