Indonesian economic growth slows to 5.3% in Q2, but beats forecast

Government spending posted the biggest growth, rising 15.97 per cent in the second quarter on the back of spending for civil servants. 

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JAKARTA: Indonesia's annual economic growth in the second quarter came in at its slowest in three as household and public spending eased, official data showed on Wednesday (Aug 5), though the figure was better than expected.

Gross domestic product (GDP) in Southeast Asia's biggest economy grew 5.29 per cent in the quarter of April to June, Statistics Indonesia said, bettering the median figure of 5.1 per cent in a Reuters poll. It grew 5.61 per cent year-on-year in the January-March period.

GOVERNMENT SPENDING POSTS THE BIGGEST GROWTH

Government spending posted the biggest growth, rising 15.97 per cent in the second quarter on the back of spending for civil servants, although slowing from a first-quarter surge of 21.81 per cent, the data showed.

"A sharp pick-up in public spending was a key contributor, while consumption received a hand from stimulus measures and limited pass-through of elevated global energy prices," said DBS Bank economist Radhika Rao.

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Resource-rich Indonesia has posted annual growth of about 5 per cent in most quarters since the COVID-19 pandemic, with momentum usually building around the Eid festive season that fell in the first quarter this year.

But markets are also anxious about a potential downgrade of Indonesia's equity market status by index provider MSCI, as well as the central bank's independence, following last week's surprise resignation of Bank Indonesia (BI) Governor Perry Warjiyo.

The rupiah currency is trading near record lows against the dollar and the stock market has lost nearly 30 per cent this year.

Shielding consumers from rising energy prices caused by the Iran war spurred greater government spending on fuel subsidies.

HOUSEHOLD SPENDING BENEFITS FROM TRANSPORT, HOTELS

Household spending, which makes up about half of Indonesia's GDP, grew 5.06 per cent in the second quarter, supported by spending on transport and hotels during school holidays, but lagged the previous quarter's growth of 5.52 per cent.

Investment growth accelerated at the fastest pace in a year to stand at 6.87 per cent in the second quarter.

Imports outpaced exports again in the April-June period, as in January-March, detracting from the GDP figure.

In terms of industries, manufacturing growth slowed, while the mining sector contracted due to quota curbs.

The construction sector notched its best expansion in almost two years, boosted by investment in infrastructure, construction in industrial zones and buildings for President Prabowo Subianto's cooperative programme in thousands of villages.

Activity in coming quarters could be hit by a BI rate rise of 100 basis points over May and June aimed at attracting capital inflows to buttress the rupiah.

"We believe both the government and Bank Indonesia will need to strike a delicate balance between supporting growth and maintaining macroeconomic stability," said Bank Permata economist Faisal Rachman.

"Persistent external pressures could widen Indonesia's twin deficits, which may trigger renewed risk-off sentiment, capital outflows, and pressure on the rupiah," he said, referring to the fiscal deficit and the current account deficit.

"These risks are likely to constrain the economy's ability to sustain stronger growth momentum going forward," he added.  

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