Indonesia Q2 GDP Preview: Slight Easing After a Robust Start
Bottom line: Indonesia's Q2 GDP growth is expected to ease to 5% yr/yr. While government consumption is expected to have remained stable, moderation in Indonesia's external sector will hold growth back. Additionally, with no longer the boost from festive demand, private consumption is also expected to have normalised during the quarter.
Figure 1: Indonesia Real GDP Growth (%)
Indonesia's economic growth likely experienced a slight deceleration in Q2-2024, our projections indicate a 5.0% expansion, down marginally from the 5.1% recorded in Q1 and 5.2%, our earlier forecast for Q2. This slowdown reflects a confluence of factors including moderating exports and the impact of high interest rates on household consumption.
Speaking at any event recently, Finance Minister Sri Mulyani Indrawati attributed the strong 5% growth expectation to robust household consumption, investment, and improving exports during the April-June period. She emphasized that despite the slight slowdown, domestic economic activity is expected to remain strong throughout the year. She added that the government expects economic activity to increase over H2-2024.
For the entire year, Indonesia's economic growth is anticipated to be about 5.1% yr/yr, which aligns with the expected range of both Bank Indonesia and the government. The official data for the second quarter is slated for release on August 6, and it is expected to confirm these projections. Export growth in Indonesia has been subdued due to declining commodity prices and an uneven economic recovery in China, the country's largest trading partner. This has led to our downward revision of growth forecasts.
Geopolitical developments present a significant risk to Indonesia's economic outlook. During a recent joint press conference, Minister Indrawati and Bank Indonesia (BI) Governor Perry Warjiyo discussed the potential impact of geopolitical tensions in the Middle East, the ongoing war in Ukraine, and upcoming elections in various countries. These global uncertainties, along with questions surrounding U.S. monetary policy, Washington's debt plans, and the Treasury yield curve, are likely to constrain capital inflows to emerging markets like Indonesia.
Despite low inflation creating a potential for lower interest rates, BI has maintained a cautious stance. Governor Warjiyo highlighted that the central bank's priority remains mitigating the spillover effects of global risks on the Indonesian rupiah. While BI had initially anticipated a rate cut by the U.S. Federal Reserve in December, recent developments suggest a possible rate cut as early as September. Consequently, BI may have the flexibility to adjust its rates in the fourth quarter, contingent on easing global uncertainties.
Inflation trends, however, provide a silver lining. Annual inflation eased to 2.13% in July, the lowest since February 2022, and within BI's target range of 1.5% to 3.5%. Core inflation edged up slightly to 1.95%, reflecting stable underlying price pressures. These inflation dynamics offer BI some room for maneuver in its monetary policy decisions, although the central bank remains focused on maintaining financial market stability. While Indonesia's economic growth faces headwinds from global uncertainties and high interest rates, the government and central bank's proactive measures will sustain domestic economic activity. The outlook for the remainder of 2024 hinges on the interplay between domestic policy responses and evolving global economic conditions, with cautious optimism.