Thought November 05, 2019 / 06:22 am UTC

Indonesia: Poor Q3 GDP Growth to Spur More Stimulus Calls

By Charu Chanana

Indonesia's Q3 GDP growth saw softer trends across all key engines of growth, with weakness in import demand the primary driver of growth. Policymakers are likely to fire on all cylinders to support growth, despite a tight fiscal situation. More monetary policy rate cuts are in the offing, along with accommodative macroprudential measures.

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.

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I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.