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Indonesia posts fourth straight quarterly GDP contraction

Nikkei Asia - May 5, 2021

Shotaro Tani, Jakarta – Indonesia's economy shrank for the fourth straight quarter, as the coronavirus pandemic remains a drag on Southeast Asia's largest economy.

Real gross domestic product fell 0.74% year-on-year in the three months ended March, data released by the statistics agency Wednesday showed, a marked improvement from the previous quarter when the economy shrank 2.19%. The figure matched that in a Reuters poll of 22 analysts.

Indonesia has kept new daily COVID-19 cases at around 5,000 in recent months, but the economy continues to suffer as mobility restrictions remain in place.

Household consumption, which makes up over half of Indonesia's GDP, fell 2.23% in the first quarter despite the government continuing to disburse funds under a social protection program.

Suhariyanto, head of the statistics bureau, told reporters that retail sales continued to contract, and while consumer confidence is gradually improving, it remains far from the level in the same period last year.

Unemployment data also released on Wednesday showed a slight improvement in the labor situation in Indonesia – unemployment rate dropped to 6.26% in February from 7.07% in August. But 19.1 million workers remain affected by the pandemic, dampening their purchasing power. Of these 1.62 million lost their jobs due to COVID-19, while 15.7 million are working reduced hours.

"Indonesia's economy struggled to gain any momentum in the first quarter of the year," Gareth Leather, Senior Asia economist at Capital Economics wrote in a memo. "Although COVID-19 infections are now well below the levels seen in January and February, the situation remains poor. The high frequency mobility data we track from Google suggest that government restrictions and social distancing remain a major drag on activity."

While GDP growth is expected to rebound strongly in the coming quarters, albeit from a low-base effect, risks remain for the country's economy.

The government has already cut the number of holidays during Eid al-Fitr at the end of Ramadan in mid-May to five from eight, and has halted sea, land, air and rail travel during the celebration period. That is expected to dampen consumption in what would normally be a period of heightened spending.

"For Eid, [normally] there should be an increase in food and beverage consumption, new clothes, homecoming transportation, hotels and restaurants. So the ban on going home will have a significant impact and limit spending on transportation, recreation, hotels and restaurants," Suhariyanto said. "The share of these three expenses to household consumption is almost 25%. So that overall the ban on going home will definitely affect household consumption."

Bank Indonesia in its April meeting lowered its annual GDP growth forecast for this year to 4.1%-5.1% from 4.3%-5.3%. Meanwhile, the government prediction is for 4.5-5.3% growth this year.

The government is pinning its economic hopes on a mass vaccination program. Started in January, more than 12 million people had received at least one shot as of Tuesday. A vaccination rate of 4.5% is much higher than regional peers Malaysia, Thailand and the Philippines. The government is aiming to reach herd immunity by vaccinating 182 million, or roughly 70% of its population, by March next year.

However, "vaccine embargoes by vaccine-producing countries that are seeing sharp increases in their own infection rates could potentially slow Indonesia's vaccination program," said Aldian Taloputra, senior economist at Standard Chartered. "The country has received 73 million doses so far, or an equivalent average 18 million doses per month; this number needs to be doubled to reach the vaccination target."

The archipelago has recently seen its first cases of more infectious Indian strain of COVID-19. With the efficacy of the vaccinations on the mutated strains still largely unknown, the government is striking a cautious tone.

"We must always be vigilant and not rush to loosen health protocols," Airlangga Hartarto, Coordinating Economic Minister, told a news conference on Monday. "These mutations are included in the WHO variant of concern because of their relatively high transmission rates. We need to limit the spread [at the current level]."

Source: https://asia.nikkei.com/Economy/Indonesia-posts-fourth-straight-quarterly-GDP-contractio