Saudi Arabia’s consumer outlook will improve this year, thanks to faster economic growth and government reforms, but subsidy cuts, VAT and rising oil prices will weigh on consumption, according to a report.

“Government stimulus and social reforms targeted at unemployment will bode well for consumers in Saudi Arabia,” the report by BMI Research, a Fitch Group company, said.

Saudi Arabia’s economic growth will accelerate this year after contracting in 2017, due to stabilising oil production and a gradual shift away from ﬁscal austerity. The kingdom’s real GDP is forecast to grow by 1.6 per cent in 2018, up from a 0.7 per cent contraction in 2017, according to BMI.

Private consumption growth will also pick up in 2018 to 2.5 per cent from 1.3 per cent in 2017, the report said, driven primarily by the government’s boost in fiscal stimulus as it begins to prioritise growth over a gradual rebalancing of public ﬁnances. Saudi Arabia has adopted a series of stimulus measures, including bonuses to civil servants and cash transfers to low-income households.

At the same time, ongoing social and labour market reforms will be positive for consumer spending, the report added.

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However, growth in the consumer sector remains somewhat hampered by the introduction of 5 per cent VAT in January, which has pushed up prices for Saudi households, and other inflationary pressures such as government subsidy cuts and rising oil prices.

“We do caution that [consumer] growth will remain tepid, due to inflation returning following fiscal reforms and a rise in oil prices, with non-oil industry diversification not picking up significantly over the short term,” BMI said.

The company forecasts inflation to average 3.3 per cent in 2018 – down from its previous forecast of 3.6 per cent and compared with 0.2 per cent deflation in 2017. Oil prices are expected to average $73 per barrel in 2018 and $77 per barrel in 2019.

“While we expect demand-pull price pressures to return, owing to an improving macroeconomic backdrop, we believe these will remain modest,” mitigated by the Saudi Arabian Monetary Authority’s tightening cycle in line with moves by the US Federal Reserve, the report said.