Saudi Arabia's economy contracted by 4.8 percent in the second quarter of 2026, shocked by the war in Iran and the effective closure of the Strait of Hormuz. According to data from the General Authority for Statistics of Saudi Arabia, this contraction was the kingdom's largest annual economic decline since the Covid-19 pandemic in 2020.
The main reason for the contraction was the collapse in the oil sector. In the period from April 1 to June 30, the oil sector shrank by 24.7 percent compared to the same period a year earlier. Since hydrocarbon revenues account for about 55 percent of government revenues, this decline dragged down the entire economy.
Non-oil activities grew modestly by 0.6 percent, while government activities grew by 0.9 percent. However, the oil sector subtracted 5.4 percentage points from annual GDP growth, while the non-oil sector contributed 0.4 points, and government activities and net taxes on products each added 0.1 points.
This result came after Saudi Arabia recorded 3 percent growth in the first quarter, highlighting the devastating impact of the regional conflict on the economy. The International Monetary Fund (IMF) said in a statement on Tuesday that the kingdom remained resilient despite the conflict thanks to long-term planning and strategic infrastructure investments. The IMF pointed to low public debt, ample fiscal reserves, and the role of the Public Investment Fund (PIF), stressing that Saudi Arabia has sufficient fiscal space to support the economy if the conflict continues.
As the region's largest oil exporter, Saudi Arabia was forced to redirect more than 70 percent of its crude oil exports from the Strait of Hormuz on its eastern coast to the Red Sea port of Yanbu following the U.S.-Israel-Iran war that began on February 28. Iran responded to U.S. and Israeli attacks by targeting Gulf countries and attacking ships in the Strait of Hormuz. In peacetime, about one-fifth of global oil and liquefied natural gas shipments passed through this critical waterway.
Export data shows that despite using the Yanbu port, Saudi Arabia could not export as much oil as before the war. According to data from organizations such as the International Energy Agency (IEA) and OPEC, crude oil exports fell from 7.28 million barrels per day in February to 3.43 million barrels per day in May.
The security of the alternative export route was short-lived. On July 20, Iran-backed Houthis in Yemen imposed a blockade on Saudi oil tankers at the Bab el-Mandeb Strait, the southern entrance to the Red Sea. On July 23, the Houthis claimed to have attacked two Saudi tankers, pushing Riyadh to seek alternative export routes beyond the Red Sea coast and the Strait of Hormuz. Although Saudi Arabia was reported to have exported additional crude oil via a port in Egypt, these volumes remained far below the quantities that could be shipped through Hormuz or the Red Sea.
On the diplomatic front, Saudi Defense Minister Prince Khalid bin Salman met with U.S. President Donald Trump and Vice President JD Vance on Wednesday. U.S. Central Command announced the same day that joint airstrikes against an Iran-backed militia group in Iraq were carried out in response to more than 30 drone attacks directed by Iran's Revolutionary Guard against Saudi Arabia earlier in the week.
