Indonesia Q4 GDP Review: Robust Start to 2024
Bottom line: Indonesia's Q1 GDP — released on May 6 — saw growth rebound to 5.1% yr/yr from 4.90% yr/yr in Q4 2023. While private consumption continued its ascent, government expenditure emerged as the key driver of Indonesia's growth narrative. Private consumption was supported by festive demand, while the government propped up economic activity ahead of presidential elections in February. Into Q2 -2022, domestic demand recovery is likely to lose momentum as net export remain soft and inflation weighs on household spending. Monetary policy will be prudent and front-loaded, but volatile IDR and rising inflation suggest that rate hikes cannot be ruled out this year.
Figure 1: Indonesia Real GDP Growth (%)
Data released by the Badan Pusat Statistik (BPS) revealed a commendable uptick in Indonesia's GDP growth to 5.11% year-on-year in Q1, marking a robust acceleration from the preceding quarters. This marked the strongest yr/yr growth recorded in three quarters. Central to this momentum were the dual engines of private and public spending, which underpinned the economy's resilience amidst a backdrop of global uncertainties. However, on a sequential basis, the economy contracted by 0.83% q/q, reflecting soft exports.
Strong Domestic Demand and Accelerating Public Spending
This uptick was primarily fuelled by robust private and public spending, with public administration playing a pivotal role in driving the expansion on the supply side. Private consumption remained a key contributor to GDP growth, buoyed by a 4.9% yr/yr increase and likely further bolstered by seasonal factors such as Ramadan. On the other hand, investment growth moderated somewhat, while export growth slowed and imports surged, indicating a reliance on domestic consumption as a growth engine. Notably, government spending emerged as a significant driver of economic growth, registering a remarkable nearly 20% yr/yr increase in Q1. This surge was fuelled by pre-election spending and public sector wage hikes, underlining the government's proactive role in stimulating economic activity. On the supply side, the expansion was driven almost solely by the public administration sector, though construction, mining, retail trade and information also showed increased levels of economic activity.
2024 Outlook
Yet, amid the sheen of robust growth, there is uncertainty on the horizon. rice pressures, fuelled by elevated food and energy prices, threaten to erode household purchasing power, limiting consumption. Additionally, the relatively subdued growth in capital formation, compounded by Bank Indonesia's recent policy rate hike to 6.25%, poses palpable headwinds to investment activity in the near term. Heightened global geopolitical tensions and slower than anticipated recovery in China also have implications for Indonesia's export sector.
Fiscal policy is still likely to remain expansionary as the focus shifts to driving medium-term growth under President-elect Prabowo Subianto's leadership. However, given prevailing headwinds and the recent rate hike, we continue to anticipate a slight loss in growth momentum over 2024, with Indonesia's real GDP growth expected at 4.9% yr/yr/ in 2024.