Indonesia: GDP expands at fastest pace since Q4 2013 as government stimulus bears fruit
August 5, 2016
Indonesia’s economy picked up steam in the second quarter, recording the best result since Q4 2013. GDP growth rose from 4.9% in Q1 to 5.2% in Q2 over the same period last year. The result overshot the FocusEconomics Consensus Forecast for a 5.0% expansion and marked a breakthrough for President Joko Widodo, who has been trying to push the economy into a higher gear.
The pickup in GDP growth came from improving domestic demand, while the external sector provided less impetus than in the previous period. Private consumption inched up from a 4.9% expansion in Q1 to a 5.0% increase, the best result since Q4 2014, helped by seasonal factors. Government consumption surged from a 2.9% increase to 6.3% expansion in Q2. Widodo’s administration has enacted a number of stimulus plans to jumpstart the economy which grew at the slowest pace since 2009 last year. However, weak tax revenues have hurt the public purse and spending is likely to take a step back in the second half of the year after the government revised the budget at the end of June. In addition, new Finance Minister Sri Mulyani Indrawati—she took office at the end of July in a cabinet reshuffle—has hinted that further cuts to spending plans could be in the pipeline. Meanwhile, fixed investment lost steam and growth slowed to 5.1% in Q2 (Q1: +5.6% year-on-year).
The external side of the economy was less supportive to growth in Q2 than in the previous quarter. While the contraction in exports moderated slightly, it was outpaced by a large increase in imports. Exports contracted 2.7% in Q2 (Q1: -3.5% yoy), while imports fell 3.0% (Q1: -5.1% yoy). Overall, the external sector add a meagre 0.1 percentage point to growth in Q2, down from a contribution of 0.4 percentage points in Q1. Subdued global demand along with low prices for commodities have hit Indonesia’s external sector, which is heavily concentrated in raw materials.
Looking forward, the economy is on track to grow at a slightly faster pace than last year as government stimulus bears fruit. In addition, looser monetary policy and falling inflation will help shore up growth.