Indonesia's Q2 2023 Growth Beats Expectations; Promising Outlook
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Indonesia's economy displayed resilience in Q2-2023, as it outpaced our expectations and the market consensus and posted a robust growth figure of 5.2% y/y. The country's GDP growth trajectory reflects a mix of factors, with domestic consumption and government expenditures leading the charge. Despite the headwinds in the external sector, the domestic engine of growth powered the economy forward. This performance suggests that Indonesia is on track to achieve its yearly growth target of 5.0-5.3% YoY, signalling bright medium term prospects.
Figure 1: Indonesia GDP growth (%)
Source: Badan Pusat Statistik
According to data from the Central Statistics Agency (BPS), GDP growth accelerated from 5.04 y/y in Q1 to 5.17% y/y in Q2. Furthermore, the economy rebounded on a quarterly basis, expanding by 3.86% q/q, recovering from a 0.91% q/q contraction in Q1. This growth was primarily driven by investment, government spending, and household consumption. Notably, investment growth gained momentum, with construction playing a pivotal role, while investment in machinery and equipment saw marginal upticks. The prudent fiscal policies of the government manifested through increased government spending, contributed to the overall growth momentum. Household consumption, a key driver of Indonesia's GDP growth, demonstrated resilience as moderating inflation supported consumer spending. However, net exports emerged as a restraint on economic growth in Q2. Export figures declined for the first time since Q4 2020. Exports have encountered difficulties recently due to global demand softness coupled with moderation in commodity prices, a contrast to the record wide trade surplus recorded in 2022.
Production side dynamics showed that growth stemmed from specific sectors. The construction (+5.23% y/y), agriculture (+2% y/y), and public administration (+8.1% y/y) sectors played instrumental roles. The mining (+5% y/y) and manufacturing (+4.8% y/y) sectors retained the status as the main growth drivers on an annual basis, closely followed by wholesale and retail trade (+5.3% y/y) as well as transportation (+15.3% y/y). While several sectors experienced robust growth, some segments like accommodation and food services, and financial and insurance sectors experienced a slight deceleration.
The impressive Q2 GDP growth bodes well for Indonesia's economy, suggesting that the country may experience only a marginal slowdown from the 5.3% expansion witnessed in 2022. As household consumption continues to recover and construction gains traction, they could compensate for the decline in exports due to slumping commodity prices. The strong performance in domestic consumption and government expenditures is particularly crucial as Indonesia navigates challenges on the external front. Meanwhile, the economy's better-than-expected performance has positioned Indonesia well to achieve its annual growth target. With inflation moderating, the prospect of household spending offsetting sluggish export growth in the coming months is promising. Additionally, increased economic activity in the lead-up to the February 2024 election could counterbalance the tapering of capital formation, which might be influenced by Bank Indonesia's recent rate hikes.