Economic growth slows in the first quarter of 2026

U.S.-Iran war weighs heavily on GDP growth: According to a preliminary reading, Saudi Arabia's GDP increased 2.8% on a year-on-year basis in Q1, following a 5.0% expansion in the previous quarter. The economic slowdown in Q1 was mainly driven by a sharp deceleration in the oil sector. This deceleration stemmed from the onset of the U.S.-Iran conflict, which resulted in damage to critical infrastructure and production facilities, while the blockade of the Strait of Hormuz disrupted oil exports. In seasonally and calendar-adjusted quarter-on-quarter terms, the economy contracted 1.5% in Q1, following a 1.4% increase in the previous quarter.

Oil sector drives economic deceleration: Compared to the prior quarter, the reading in Q1 improved for government non-oil activities (1.5% in year-on-year terms vs -1.2% in Q4). In contrast, readings worsened in Q1 for the oil sector (2.3% vs 10.8% in Q4) and the private non-oil sector (2.8% vs 4.3% in Q4).

Economic recovery remains tied to regional stability: Our panelists have slashed their GDP growth forecasts since the conflict in the Middle East started. GDP growth is now projected to hit a three-year low in 2026. However, Saudi Arabia’s ability to reroute oil exports via the Red Sea should help to mitigate the war’s impact compared to most other Gulf countries. While the near-term outlook remains contingent on the reopening of the Strait of Hormuz, the Kingdom is well positioned for a robust recovery.

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