Investing.com -- Saudi Arabia’s non-oil economy is showing early signs of losing momentum, according to Capital Economics.

While headline GDP growth is expected to improve due to rising oil production, recent data suggest that underlying non-hydrocarbon activity may weaken.

The flash estimate of first-quarter GDP showed growth in the Kingdom was broadly unchanged at just under 1% quarter-on-quarter on a seasonally adjusted basis. The oil sector, which had been a drag, is likely to contribute more going forward as OPEC+ begins to unwind its voluntary production cuts.

Saudi oil output is expected to rise from 9.0 million barrels per day in April to 9.2 million in June, a 3% increase from the first quarter.

Capital Economics estimates that output will reach 10.1 million barrels per day by the fourth quarter, a 13% rise from current levels.

“This will mechanically feed through to oil GDP and lift overall GDP growth (by some 0.8%-pts this year on our estimates),” Capital Economics said in a Wednesday note.

At the same time, non-oil indicators are softening. The April PMI dropped to 55.6 from 58.1 in March, marking an eight-month low.

“On past form [this] would be consistent with a slowdown in private non-oil GDP growth to ~0.5% q/q in Q2,” the report noted. Consumer confidence has also slipped, with the Ipsos/LSEG index falling to its lowest level since July.

Meanwhile, spending trends are starting to turn. While most consumer metrics were strong in the first quarter, more timely point of sale transactions data “have shown a slump so far in Q2.”

Lower oil prices are also expected to weigh on fiscal and external balances, prompting a renewed focus on fiscal consolidation. Capital spending cuts are reportedly targeting major “gigaprojects,” and more goods are now subject to the 15% VAT rate.

Although headline GDP growth is forecast to rise to 4.8% this year, the firm cautioned that “headline GDP growth forecasts don’t tell the full story.”

“They’re heavily distorted by changes in oil output, which masks what’s happening in the rest of the economy,” the note adds.

Non-oil sector growth is expected to slow below 3% year-on-year by year-end and fall to less than 2% in 2026, levels “more akin to the growth rates recorded in 2016-17 than those seen in recent years.”