Saudi Economy Contraction Worsens Amid Ongoing US-Iran War

Saudi Arabia's economy has experienced its deepest quarterly contraction since the COVID-19 pandemic, driven by a sharp downturn in the oil industry. The country's gross domestic product (GDP) shrank 4.8% year-on-year in the three months through June, compared to 3% growth in the first quarter, according to preliminary data from the General Authority for Statistics.

The decline in the oil sector was a major factor, with a 24.7% decrease in production levels. This has been attributed to the ongoing US-Iran war, which is affecting Saudi Arabia's ability to export crude oil through the Strait of Hormuz.

Ziad Daoud, chief emerging markets economist for Bloomberg Economics, noted that the Iran war is squeezing Saudi Arabia in two ways: by hammering crude output and weakening other businesses. A gradual reopening of shipping routes could prevent the economy from contracting this year, although renewed US-Iran escalation and attacks by Houthis and Iraqi militias make this less likely.

Despite these challenges, some economists believe that Saudi Arabia may still manage to record positive growth in 2026, along with Oman. The International Monetary Fund (IMF) expects Saudi economic growth to slow to 1.7% in 2026 before accelerating to 5.5% the following year.