Indonesia: GDP records first contraction since Asian financial crisis in Q2
August 5, 2020
The economy worsened in the second quarter, with GDP contracting 5.3% on an annual basis (Q1: +3.0% year-on-year) due to Covid-19 containment measures.
The downturn was broad-based, with private consumption, public spending, fixed investment and exports all contracting. Household spending fell 5.5% in the second quarter, which contrasted the first quarter's 2.8% expansion. Public spending fell 6.9% in Q2 (Q1: +3.7% yoy), as the government struggled to execute its fiscal support package due to administrative problems. Fixed investment was down 8.6% in Q2, contrasting the 1.7% expansion in the previous quarter, as elevated uncertainty caused firms to halt investment plans.
Exports of goods and services fell 11.7% on an annual basis in the second quarter, which was below the first quarter's 0.2% expansion. In addition, imports of goods and services fell at a more pronounced pace of 17.0% in Q2 (Q1: -2.2% yoy), reflective of depressed domestic demand. As a result, the contribution of the external sector to growth increased.
Looking forward, the economy should fare somewhat better in the second half of the year on stronger global demand, although elevated Covid-19 cases at home will likely keep domestic momentum restrained, and activity is still seen contracting in annual terms throughout the year. Commenting on their outlook, analysts at Nomura comment:
“While Q2 is likely to be the bottom in this downturn, the path to recovery remains fragile […]. We continue to think the normalisation of economic activity is unlikely to happen quickly, even though a greater portion of the country was reopened from early June, because of the still rising new daily COVID-19 cases. If anything, we think the recent acceleration in new cases of infection suggest that the early economic reopening may have increased local transmissions even further and may require either the reimposition of PSBB restrictions or lead to even weaker sentiment from businesses and households.”
Author: Oliver Reynolds, Economist