Indonesian economic growth accelerates slightly in Q2, growth likely to average 5.10 pct in 2018

Indonesian economic growth came in slightly above expectations in the second quarter. The economy grew 5.3 percent on a year-on-year basis. Domestic demand rose by its most rapid rate in 14 quarters at 6.6 percent year-on-year. Out of this, inventories added 1 percentage point to the growth, surging from 0.4 percent in the first quarter 2018.

Consumption also boosted domestic demand, accelerating to 5.2 percent year-on-year from 4.8 percent previously. Both government and private consumption supported the growth. Activity in private consumption rose given the Hari Raya festivities that occurred in June 2018 as opposed to July last year. The government’s disbursement of the annual wage supplement in the quarter also led to rise in demand.

In the meantime, investment activity eased to 5.9 percent on a year-on-year basis in the second quarter after rising by an average of 7.4 percent year-on-year in the last three quarters. The wider trade deficit also weighed on growth, subtracting 1.2 percentage point to overall GDP growth.

“We continue to expect Indonesia’s GDP growth to average 5.10 percent in 2018, at the lower bound of the central bank’s 5.10-5.50 percent projection”, noted ANZ in a research report.

While a rebound in fiscal spending is expected, softer investment is expected to counter it. The recovery in private consumption is also expected to be for a short span of time with the effect of BI’s cumulative 100 basis point rate hike resulting in higher savings.

“We continue to expect BI to hike policy rate by 25bps to 5.50 percent next week. The central bank’s aggressive tightening remains focused on managing market volatility, in our view”, added ANZ.