Indonesia growth may slow most in year on manufacturing slump
INDONESIA’S economic growth may have slowed last quarter as a spate of factory closures and job cuts likely weakened consumption and investment.
Gross domestic product probably grew 5 per cent in the three months to September from a year ago, according to a median estimate of 32 economists in a Bloomberg survey. That would be the slowest quarterly pace since the 4.94 per cent expansion posted in the same period a year ago.
“The GDP growth in the third quarter is seen to slow further due to weaker domestic demand and investment amid contraction in industrial activity and rampant layoffs,” said Hosianna Evalita Situmorang, an economist at PT Bank Danamon in Jakarta.
It marks the difficult road ahead for newly inaugurated President Prabowo Subianto as he aims to boost growth in South-east Asia’s largest economy to as high as 8 per cent during his five-year term. While Indonesia’s growth stands out among the fastest in the region, the cracks emerging in its manufacturing sector could jeopardise employment and consumer spending that are critical to the US$1 trillion economy.
Labour-intensive industries, particularly apparel and footwear, suffer from a sharp decline in overseas demand and the influx of cheaper imports flooding the domestic market. The sector has seen a rising number of factory closures and debt distress such as with textile giants PT Sri Rejeki Isman, also known as Sritex, and PT Pan Brothers.
Job cuts in Indonesia rose by 31 per cent from a year ago as at October, reaching nearly 60,000, according to labour ministry data. Manufacturing activity has also contracted for four consecutive months, its longest slump since at least 2021, based on the S&P Global purchasing managers’ index.
That comes at a precarious time when many Indonesians have yet to regain formal employment after the pandemic. About 9.5 million people have fallen out of the country’s middle class – a crucial driving force behind domestic consumption that makes up more than half of GDP.
The government has unveiled a number of measures in response, including extending tax perks for house purchases and imposing import duties to protect the local market. Bank Indonesia has also started to lower its benchmark interest rate to help bolster spending and investment, but its easing campaign has been put on hold amid currency volatility. In the meantime, it’s expanded incentives to banks lending to labour-intensive businesses.
Indonesia will need to reorient its industrial policy towards developing export-oriented service industries for the economy to grow beyond 5 per cent, Citigroup economist Helmi Arman wrote in a note. Refining raw metals onshore – a priority of Prabowo and his predecessor Joko Widodo – has helped boost growth but has not created enough jobs, he added.
“Services exports such as tourism are more labour intensive and may generate more FX conversion,” Arman said. “Yet emphasis on this has not yet been seen in the government programmes.” BLOOMBERG
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