Indonesia: Growth softens in Q4 on budget cuts
February 6, 2017
Indonesia’s growth eased in the fourth quarter of 2016, expanding at the slowest pace since Q1. GDP expanded 4.9% over the same period of the previous year, down slightly from Q3’s 5.0% expansion. The result came in 0.2 percentage points below market expectations. Despite lackluster growth, both private consumption and fixed investment data show an economy largely on a steady footing.
The moderate slowdown came as a result of another significant decrease in government consumption, following state budget cuts in response to a legally-binding deficit ceiling. Government spending contracted 4.0%, a sharper decline than Q3’s 3.0% contraction and a multi-year low. The dismal reading likely also reflects base effects from increased government spending ahead of Q4 2015’s regional elections. Private consumption growth, meanwhile, was stable at 5.0% and unchanged from the previous quarter. Offsetting Q4’s government spending cuts was an unexpected boost from fixed investment, which increased from 4.2% in the previous quarter to 4.8%.
The external sector contributed 0.3 percentage points to growth as exports grew by a modest 4.2%, rebounding from a sharp 5.6% contraction in the previous quarter. The swing was likely attributable to stronger commodity prices which benefited the heavily-weighted commodity export sector. Import growth rebounded more modestly, from a 3.7% contraction in the previous quarter to a 2.8% expansion.
In 2016, GDP growth climbed slightly to 5.0% from 4.9% in 2015, reflecting solid domestic demand despite constrained government spending. Looking ahead, the economy is on track to grow at a faster pace than last year, bolstered by a favorable electronics export cycle and improving terms of trade. In 2017, domestic demand is also expected to get a boost from higher public infrastructure spending, which will likely crowd-in private sector investment.
Author: Christopher Thomas, Economist