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Saudi Arabia's preliminary GDP figures indicate a technical recession, mainly due to reductions in oil production, despite the non-oil economy maintaining strong growth, says a report from London-based Capital Economics.

The report says that with the kingdom's decision to voluntarily decrease its daily oil output by 1 million barrels a day, set to be extended following this week's Opec+ meeting, the economy is increasingly likely to experience a contraction for the entirety of this year.

Statistics show a decline in GDP by 0.1 per cent quarter-on-quarter in the second quarter, following a decline of 1.4 per cent in the first quarter. This has resulted in a slowing of year-on-year growth from 3.8 per cent in the first quarter to 1.1 per cent in the second.

The downturn is largely caused by the oil sector, which contracted by a further 1.4 per cent quarter-on-quarter due to the Opec+ oil production cuts. Despite the nearly 2 per cent quarterly growth in the non-oil sector, the decline in the oil GDP has overshadowed these improvements.

Looking to the future, Saudi Arabia has adopted even more stringent cuts to its oil production in the third quarter, with an additional voluntary reduction of one million barrels per day in July and August.

Capital Economics expects this to counter further strength in the non-oil sector, leading to an expected contraction in GDP of around 3 per cent quarter-on-quarter in the third quarter. It also says there is a growing possibility that the upcoming Opec+'s Joint Ministerial Monitoring Committee meeting will result in the kingdom announcing the extension of this voluntary cut until at least the end of September.

If this occurs, the economy is expected to shrink by around 0.5 per cent over the entirety of 2023. Excluding the global financial crisis and pandemic, this would mark the poorest GDP performance in over two decades.