Indonesia: GDP growth loses steam in Q1
May 4, 2016
Indonesia’s economy grew at the slowest pace in six years in 2015 and data for the first quarter of this year showed that growth remained stuck in the doldrums. GDP growth inched down from Q4’s 5.0% to 4.9% in Q1 2016 over the same period of the previous year. The result was slightly below FocusEconomics’ expectations of a 5.0% expansion and marked a setback to President Joko Widodo’s efforts to push the economy into a higher gear.
Surprisingly, the moderation in GDP growth came mainly from domestic demand. Government consumption slowed notably from Q4’s 7.3% increase to a 2.9% expansion. Although Widodo has enacted a number of stimulus plans to shore up Indonesia’s economy, delays have hampered public spending and weak revenues are threatening the government’s ambitious plans. Tax collections have fallen so far this year and low prices for commodities are hitting revenue from natural resources. Fixed investment also moderated, rising 5.6% in Q1 (Q4: +6.9% year-on-year). The result is likely due to weak private investment as the available evidence suggests public investment picked up—public capex disbursements surged in Q1. While, on the bright side, private consumption stabilized growing at Q4’s pace of 4.9% again in Q1.
In the external sector, exports and imports continued to plunge. Exports contracted 3.9% in Q1 amid sluggish global demand and falling commodity prices (Q4: -6.4% yoy). Imports dropped 4.2%, which was a less pronounced fall than Q4’s 8.1% decrease. As a result, the external sector’s net contribution to overall growth moderated slightly to 0.1 percentage points in the first quarter.
The disappointing GDP result is likely to place more pressure on the government to spur stimulus and reforms. However, legal stipulations combined with weak revenues could interfere with the government’s plans. Tim Condon, Chief Economist at ING, points out:
“The disappointing data will raise questions about the need for additional stimulus, which, with the fiscal route closed, points to BI rate cuts. We have one more rate cut penciled in for the fourth quarter, one more than the consensus, and we’re not changing our forecast.”