Investment in Indonesia

Indonesia - Investment

Growth accelerate on low base effect in Q2

GDP rebounded in the second quarter, growing 7.1% year-on-year and contrasting the 0.7% contraction recorded in the first quarter. Q2’s reading marked the strongest growth in over a decade, helped in no small part by a healthy base effect: Q2 2020 saw GDP contract 5.3% in annual terms due to the pernicious effects of the pandemic.

The upturn reflected a broad-based improvement in domestic demand. Household spending bounced back, growing 5.9% year-on-year in Q2 compared to a 2.2% expansion in Q1. Moreover, government spending accelerated to an 8.1% increase in Q2 (Q1: +2.3% yoy), while fixed investment rebounded, growing 7.5% and contrasting the 0.2% decrease recorded in the prior quarter.

On the external front, exports of goods and services increased 31.8% on an annual basis in the second quarter, which was above the first quarter's 7.0% expansion. In addition, growth in imports of goods and services picked up to 31.2% in Q2 (Q1: +5.5% yoy). As such, the external sector detracted 0.8% from overall growth, swinging from the prior quarter’s mild 0.1% contribution.

While GDP growth should slow from Q2’s level in the second half of the year, it is still set to remain healthy, supported by fiscal and monetary policies and unleashed pent-up demand. However, a relatively slow vaccination program at home and surging daily Covid-19 cases since the start of July are key risks to the outlook.

Commenting on the outlook, Enrico Tanuwidjaja and Haris Handy, economists at United Overseas Bank, stated:

“Going forward, we expect growth momentum in H2 2021 to dissipate amidst the ongoing multi-level social restrictions implemented to control the recent soaring of infection rates due to the Delta variant-led wave. The negative impact from these measures has been reflected in the mobility indicator that recently fell back to its early 2021 level and also shown by July 2021’s manufacturing PMI index which plunged to 40.1. At the same time, we are cognizant of the cushioning impact from the recent stimulus package to soften the economic blow in Q3 2021. Nevertheless, on balance of all accounts, we are revising our 2021 baseline growth forecast lower to 3.5% (from 3.8% previously).”

FocusEconomics Consensus Forecast panelists expect GDP to expand 4.3% in 2021, which is down 0.2 percentage points from last month’s forecast. In 2022, GDP is seen growing 5.3%.