At the same time, inflation has been below "our expectations," the report said. "Although risks to our outlook are on the downside for the remainder of the year given the uncertainty over events in the euro zone, 2011 will be a year of strong performance for the Saudi economy," it noted. The Kingdom's real GDP growth is projected to rise to 7.1 percent from 5.6 percent. Oil production has been raised to long-term highs this year to compensate for the disruption to Libyan output. Although Libyan output is resuming (it reportedly hit 350,000 barrels per day in early October), Saudi oil production has remained high. Saudi Oil Minister Ali Al-Naimi said production was 9.39 million barrels per day in September, compared to 8.1 million barrels per day in September 2010. Jadwa forecast that Saudi production will fall in order to keep oil prices fairly stable while Libyan output is ramped up, but have revised up projection for average production this year to 9.2 million barrels per day from 8.8 million barrels per day. Overall forecast for non-oil growth is little changed. The value of cash withdrawals from ATMs in the first eight months of this year is 24 percent higher than for the same period of last year; for point of sales transactions, the growth is 37 percent. This suggests rapid growth for the retail sector, the report said. With 4.93 million pilgrims arriving so far this year, a 60 percent increase on last year, retail, which includes wholesale, restaurants and hotels, is expected to be the fastest growing non-oil sector this year. However the impact of the strong retail sector on the rest of the economy will be relatively mild, as much consumer spending is on imported goods; the volume of consumer goods imports through the ports over the first seven months of this year is 15 percent higher than in the same period of 2010. Available data also cited healthy growth in the construction sector. Cement sales over the first nine months of the year are 12.6 percent higher than in the same period of last year and the volume of imports of construction goods through the ports between January and July are 8 percent greater than in the first seven months of 2010. With the government committed to a substantial house-building program over the next few years, construction should remain one of the fastest growing sectors. Growth of the telecoms sector, which had been the fastest growing part of the economy in recent years, seems to be slowing, though it remains brisk. The number of mobile phone subscribers rose by 6.2 percent in the first half of 2011, compared to annual growth of 15 percent last year and an average of 25.6 percent over the previous two years. In contrast, the number of internet users increased by 9.7 percent in the first half, almost the same as the growth for the whole of 2010. Numbers of mobile broadband subscribers continue to surge. Port data give a guide to the volume of exports of manufactured products. Exports of petrochemicals were 5 percent higher over the first seven months of this year compared to the corresponding period of 2010 and those of industrial products were 11 percent greater during the same period. However, weakening of the global economy may dampen manufacturing export growth over the remainder of the year. The report also pointed to the revival in bank lending. Year-on-year bank lending growth is running slightly ahead of our expectations and at 9.4 percent in August was the highest since April 2009. Monthly growth has averaged 1 percent so far this year, a level not seen since the final quarter of 2008. High government spending has made lenders and borrowers more comfortable with the economic environment. At the same time, banks have covered all the non-performing loans that built up on their books in recent years and so have much less need to devote funds to building up provisions, rather than lending. The local outlook is supportive for continued growth in bank lending, but this would be disrupted by a dramatic intensification of the banking problems in the euro zone, even though the Kingdom's banks would probably not be directly impacted. Aside from the problematic global situation, Jadwa remained optimistic on two factors: The first is that the purchasing managers' index (PMI) fell to the lowest level in its two-year history in September. Although it still points to an expanding economy, the decline may reflect the impact troubles in the euro zone and financial markets are having on the economy. Second, while there is clearly a logical link between cement sales and construction GDP, the chart to the left shows there is no relationship between the two series. It is a similar situation for ATM and point of sale data and growth in the retail sector. Inflation is another area where performance has been better than had been anticipated. Over the first eight months of the year, year-on-year inflation has averaged 4.8 percent and despite the jump in consumer and government spending has been little changed, staying in a range of between 4.6 percent and 4.9 percent since February. However, Jadwa still saw the potential for inflation to break above 5 percent before the end of the year, but have revised down our forecast for average inflation for this year to 4.9 percent from 5.4 percent. Food price inflation has fallen this year, from 7.6 percent in December to 5.4 percent in August. The decline is surprising given the trends in international food prices over the period. According to the UN Food and Agriculture Organization, global food prices were an average of 34 percent higher in the first eight months of this year than in the corresponding period of 2010. In late 2007 and early 2008, when global food price inflation exceeded 40 percent, local food price inflation reached almost 16 percent. There is a lag in the time it takes for international price trends to be reflected in local markets, but the lack of response is unusual, Jadwa said. Rental inflation has been on a downward trend too, for most of the year, falling from 8.5 percent in December to a three-year low of 7 percent in May. However, it has ticked up over the past few months to stand at 7.8 percent in August. Rental inflation had been falling in response to an increase in supply of accommodation; high prices have also deterred some from entering the rental market. The prospect of a much greater supply from the government house-building program means that rental inflation will probably be fairly stable for the remainder of the year.
