The Hormuz shock has landed in the hard data, and it reads two ways depending on where you look. Saudi’s real GDP contracted 4.8% y-o-y in 2Q 2026, according to a flash estimate from Gastat (pdf), the Kingdom’s first annual contraction since 4Q 2023 and its steepest since the pandemic-hit 2Q 2020. Yet in the same quarter, government revenue rose 12% and the budget deficit shrank to its smallest level of the year, according to the finance ministry’s 2Q budget performance report (pdf).

The GDP contraction was almost entirely oil. Oil activities plunged 24.7% y-o-y as Aramco cut output following the near-closure of the Strait of Hormuz, subtracting 5.4 percentage points from headline growth, more than the entire 4.8% contraction. Strip oil out, and the economy still expanded.

The GDP non-oil number is the one to watch. Non-oil activity grew just 0.6% y-o-y, down from 2.9% in 1Q and 4.6% in 4Q 2025, the fourth straight quarter of slowing non-oil growth. On a seasonally adjusted basis, non-oil output actually shrank 0.5% q-o-q, its first quarterly contraction of the cycle. Government activity rose 0.9%.

REMEMBER- We flagged the forecast cuts last month: A Reuters poll had trimmed Saudi 2026 growth to 1.4%, below the IMF’s 1.7%, even as the Kingdom stayed one of only two GCC economies (with Oman) still expected to grow.

But real GDP counts barrels, and the budget counts SAR. The government’s oil revenue rose 22% y-o-y to SAR 185.1 bn during the quarter, as higher crude prices more than made up for the lost export volumes, a mechanism the IMF flagged when it concluded its Article IV consultation last week. Total 2Q revenue climbed 12% y-o-y to SAR 338.8 bn, and the quarterly deficit shrank to SAR 34.3 bn, down from a record SAR 125.7 bn in 1Q.

That does not mean the books are balancing. Spending rose 11% y-o-y in 2Q and 15% across 1H, outpacing revenue and leaving a first-half deficit of SAR 160 bn. That is already 97% of the SAR 165.4 bn shortfall the government budgeted for the entire year, with two quarters still to run. Either 2H swings sharply toward balance or the Kingdom overshoots its deficit target.

Where the money went tells you the fiscal strategy: Riyadh is spending into the shock rather than pulling back. First-half subsidies more than doubled y-o-y (up 117% to SAR 30.8 bn), capital spending rose 32% to SAR 89.7 bn, and outlays on infrastructure and transport climbed 21%. The subsidy surge looks like the “targeted, temporary” cushioning the IMF endorsed.

How it is funded matters more than the deficit itself. The entire 1H shortfall was covered by borrowing, with no drawdown of government reserves, which was held at SAR 399.1 bn. Public debt rose to SAR 1.685 tn by the end of June from SAR 1.519 tn at the start of the year.

What’s next: The IMF is holding its full-year 2026 call at 1.7% (2.6% non-oil) and sees a 5.5% rebound in 2027, both contingent on Hormuz traffic normalizing, which economists polled by Reuters expect over the next six to 12 months. But with 2Q at 4.8% contraction, 1H is tracking negative, so that full-year forecast now leans on a sharp second-half recovery that has not begun. Watch the 3Q flash estimate, due end-October, for whether non-oil re-accelerates or the q-o-q contraction deepens.

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