Indonesia’s Q3 GDP growth came in at 5.02% y/y, which sustains the country's 5+% growth trend since 2013, but still marks the lowest rate in two years. Subdued performances in all key engines of growth underpinned, and only weakness in import demand (partially driven by import curbs) helped keep the growth trajectory on track.
Household consumption, which constitutes over 50% of Indonesia’s GDP, saw softer growth of 5.01% y/y in Q3 from a 5-year high of 5.17% y/y in Q2. Global demand weakness and protectionist trends possibly weighed on domestic sentiment. Government consumption growth dropped to 0.98% y/y, the lowest since Q2 2017, with lower tax revenues weighing on government finances.
Meanwhile, trade and investment growth trends continued to suffer due to the Asian region coming in the crosshairs of the U.S.-China trade war. Gross fixed capital investments saw growth of 4.21% y/y in Q3, which was the lowest in over three years. Export growth was meager as well, but weaker imports helped.
Policymakers are likely to fire on all cylinders to support growth. The government is widening its budget deficit to more than 2% of GDP this year and Bank Indonesia is likely to cut the policy rate further after having already announced 100 bps of cuts since July.
These future rate cuts, along with some fiscal measures and an accommodative macroprudential policy, may help revive domestic demand pressures into 2020. We maintain our 2019 GDP growth forecast of 5.0% and expect an improvement to 5.2% in 2020.