Behind Indonesia’s 5% growth lies a less rosy economic picture
INDONESIA’S growth performance last quarter is poised to top most of its peers in South-east Asia, but its path ahead is tricky amid widening cracks in the economy after the pandemic.
While its latest gross domestic product print shows a consumption boom that is hovering near levels a decade before the pandemic, it has largely left behind lower-income households beset by low wages and limited opportunities.
Without the spending on major Muslim holidays that propped up growth in South-east Asia’s largest economy to 5.2 per cent in the April-to-June period, economists expect a deceleration to 5 per cent then 4.9 per cent in the next two quarters.
That casts doubt on a region that has been insulated from the global recession risk because of its strong domestic economies. Neighbouring Philippines also reported a sharp slowdown in second-quarter growth as inflation doused revenge spending, while Singapore posted slower than initially estimated figures. Vietnam is struggling to meet its target. Malaysia and Thailand have yet to report last quarter’s GDP.
“We are forecasting GDP growth at 4.6 per cent in 2023, lower than the pre-pandemic potential growth of 5.3 per cent,” HSBC Holdings economist Pranjul Bhandari said of Indonesia, citing El Nino, a pullback in state spending and tepid external demand as hurdles.
“In fact, we think that a weaker-than-potential growth is likely keeping core inflation at low levels.”
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Much of the scrutiny zeroes in on the strength of consumption, which powers over half of Indonesia’s GDP.
Retail sales have been patchy this year – largely driven by basics such as food, beverage and fuel, while discretionary spending has yet to bounce back. Consumer giants such as Indofood CBP, Matahari Department Store and Unilever Indonesia reported disappointing revenues last quarter.
Consumer confidence slipped to a four-month low in July. The readings are more dire in the lowest income band.
Those who spend an average of one million rupiah (S$88) to two million rupiah a month are barely optimistic about income and job availability, and are pessimistic about their likelihood of purchasing durable goods.
This also highlights the inequality of Indonesia’s post-pandemic rebound, as the economy was already able to regain upper-middle income status this year despite unemployment and poverty remaining stubbornly above pre-pandemic levels.
“The main thing holding consumption back is lacklustre wage growth,” said Miguel Chanco of Pantheon Macroeconomics, expressing some doubts on the credibility of the second-quarter GDP print.
“There was a huge slowdown in nominal earnings growth early this year, enough to push wage growth in real terms back into the red.”
Capital Economics wrote after the Aug 7 data that “growth has slowed sharply over the past year and the economy is expanding at a slower pace than the official figures show”, citing its Activity Tracker.
For Bloomberg economist Tamara Mast Henderson, the recovery in household and government spending last quarter and faster investment will help to tide the Indonesian economy over.
Without the cover provided by a buoyant consumer sector, Indonesia will have to lean on other growth engines such as investment and exports, which are contending with borrowing costs at a four-year high and lower global commodity prices.
“All in, we think GDP growth could moderate in the second half as domestic demand ebbs, while exports remain soft due to slowing global growth,” said Brian Lee, an economist at Maybank Securities.
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