* Fastest GDP growth since Q1 2016
* But acceleration is due to higher oil output
* Non-oil growth slows slightly from Q2
* Further austerity could hurt private sector recovery
* Oil output restraint from Q1 to hit headline GDP (Adds analysis of outlook for 2019)
By Andrew Torchia
DUBAI, Dec 31 (Reuters) - Saudi Arabia’s economy grew in the third quarter at its fastest rate since early 2016, boosted by expansion of the oil sector while non-oil growth stayed sluggish, statistics agency data showed on Monday.
Gross domestic product grew 2.5 percent from a year earlier. That was an acceleration from the second quarter, when GDP rose 1.6 percent, and the fastest since the first quarter of 2016, when the same rate was registered.
The Saudi economy has been hit hard in recent years by low oil prices and state austerity measures to curb a huge budget deficit. In 2017, it shrank for the first time since the global financial crisis nearly a decade earlier.
Monday’s data suggested the recovery from that slump was still tentative. GDP growth picked up largely because of higher oil output. The oil sector expanded 3.7 percent from a year ago in the third quarter, after 1.3 percent in the second.
Growth in the non-oil sector, key for job creation and Saudi Arabia’s effort to diversify its economy, slowed to 2.1 percent from 2.4 percent.
Saudi officials have predicted a gradual acceleration of the non-oil economy next year. Bank lending to the private sector rose 2.3 percent from a year earlier in November, its fastest growth since 2016.
This month Riyadh released a state budget for 2019 that would increase spending by 7 percent from this year’s actual level. Investment spending and bonuses for state employees in the budget could revive the private sector.
But senior officials have refused to rule out further austerity steps next year, including a planned hike in fees for hiring foreign workers and a possible increase in domestic fuel prices. Such steps have weighed heavily on private sector firms.
Meanwhile, global producers agreed early this month to cut oil production in an attempt to prop up prices. Saudi Arabia said it would cut output in January by almost 5 percent from December, which would shrink the oil sector and dampen headline GDP growth. (Reporting by Andrew Torchia; editing by John Stonestreet and Jon Boyle)