Saudi Arabia's economic transformation is underway. The country is going through an unprecedented period of social, economic, and political reforms, designed to diversify its economy away from hydrocarbons. In the next couple of years, these reforms will continue to raise domestic demand indicators, particularly ones related to household spending, tourism, and construction. This boost will come mainly via development projects in the government's Vision 2030 plan, which is changing much of Saudi Arabia's economy and society. For instance, in terms of domestic demand metrics, the country is lagging most peer economies, but given the scale and extent of Vision 2030-related initiatives, there is significant catch-up potential. As these projects will contribute to increased household consumption and investment, we think that non-oil GDP growth will be strong over the medium term. However, further success of diversification efforts will depend on improved labor productivity.

Non-Oil GDP Is On The Rise

Saudi Arabia's non-oil GDP has grown significantly in the past 10 years, overtaking oil sector's increase. Retail trade, government, and finance have led the way. Despite some setbacks from recent oil production cuts, indicators point to strong overall non-oil performance later this year (see charts 1 and 2).

Chart 1

Chart 2

Nevertheless, despite the pick-up in domestic consumption in recent years, the share of nongovernment consumption of Saudi Arabia's total economy remains far below that of peers with similar GDP per capita, as well as those of some major oil exporters (see chart 3). In Saudi Arabia, as with other Gulf oil exporters (such as Qatar and Brunei), household consumption's share of GDP is 15-20 percentage points lower than in economies of similar income, commodity exporters included.

Chart 3

Current numbers imply that there is significant potential to increase household consumption and, by extension, the non-oil sector's share of the economy. Domestic consumption's low share of overall GDP reflects the oil activities sector's crucial economic role, accounting still for more than 30% of GDP directly in early 2024; the small share of household spending on recreational activities (accounting for 7%-8% of total spending), relatively low household credit (less than 30% of GDP), and subdued real wage growth (although it has recently started to pick up via Vision 2030 reforms).

Vision 2030 Projects Are Lifting Consumption

The Saudi government, through the Vision 2030 framework, has rolled out a series of initiatives aimed at boosting domestic consumption, tourism, and economic diversification. We therefore expect that growth in household consumption and domestic demand will continue to exceed that of other GDP components.

Vision 2030 includes the development of megaprojects, such as NEOM, Qiddiya, Al Ula, Jeddah Historic District, and the Red Sea Project, which the government expects will generate spending in tourism and entertainment. Recent news reports indicate that NEOM and some other projects could be recalibrated. Yet we expect other projects will be accelerated; in fact, some projects, such as Diriyah and Al Ula, are partially complete.

To further stimulate consumer spending, the Saudi government launched the Quality of Life Program, which focuses on developing the entertainment, cultural, and sports sectors via new cinemas, theme parks, museums, and sports facilities. All of these will provide residents with more avenues to spend disposable income. In addition, the government has announced its goal to boost the share of household spending on entertainment to 6.0% by 2030 from about 2.9% currently.

Social reforms are likely to increase disposable income and therefore consumption. For example, one of Vision 2030's goals is to raise women's labor force participation to 30% from 18% (it is already more than 35%). Other reforms enhance economic participation of women, including work in previously off-limits sectors, and participate in sports and entertainment. Increased labor participation rates are likely to raise household disposable income, which in turn will boost consumption. At the same time, the government-enacted Saudization of the labor force is very likely to push upward pressure on wages.

Tourism is also on the rise. Tourist arrivals (both domestic and international) have increased over the past several years, with government planning to boost the total number of visitors to 150 million by 2030. We expect that the introduction of e-visas and the completion of megaprojects will increase international arrivals, which in general account for a higher share of total tourist spending (see charts 4 and 5).

Chart 4

Chart 5

Giga- and megaproject-related construction efforts will also lift domestic demand. Total estimated costs of the Vision 2030 megaprojects exceed $1 trillion (including NEOM, accounting for up to half of that) and account for almost 90% of Saudi Arabia's GDP. Even assuming the potential downscaling of NEOM, the construction of megaprojects and the associated expense will be a key factor behind growth for the next five years, although its effect on GDP will be partially contained due to a corresponding increase in the import of construction materials and reliance on external parties.

Domestic Demand Expansion Might Decrease Oil Activities' Share Of GDP To 24%-26% By 2030

We expect that up to 2030, growth in domestic demand will be primarily fueled by megaprojects and associated construction costs and investments, but we also expect a significant pick-up in household spending, due to expected growth in disposable income among Saudi nationals and government initiatives to lift entertainment and tourism-related spending.

Assuming the timely completion of Vision 2030 megaprojects (with some exceptions, such as Al Ula, which should be finished by 2035), the gradual recovery of oil production by 2028 (to 11 million barrels per day), and modest increases in direct government expense of about 1% annually, we expect oil GDP to decrease to 24%-26% of total GDP by the end of 2030 (see chart 6). We expect that with NEOM's completion, oil GDP will decrease to 24% of the total from 35% in 2017, when Vision 2030 reforms started. According to our estimates, even downscaling of Neom to 50% of its original budget will lead to the oil activities sector share representing about 26% of GDP. These levels are broadly in line with the relative size of the oil sector in some non-Gulf exporting countries, such as Norway.

Chart 6

Although we expect non-oil GDP growth to rise from the increased domestic demand in the next couple of years, beyond that time, labor productivity will be a key factor in growth. This will be especially true when most megaprojects wrap up and the initial momentum in domestic consumption dissipates. Up to now, productivity growth has been slow, which likely reflects the low degree of diversification and employment growth in sectors with lower productivity. In Saudi Arabia, labor productivity growth has been lagging both developed and emerging economies for the past 20 years (see chart 7). We expect Saudi Arabia's ability to generate labor productivity growth via Vision 2030 will remain a key factor in economic diversification efforts over the long term.

Chart 7

Related Research

• Vision 2030: Four Scenarios For Saudi Arabia's Public Finances, May 6, 2024
• Greater Share Of Working Women Bolster Saudi Arabia's Economic Growth, Improving Productivity Will Entrench It, Sept. 20, 2023