Purbaya Yudhi Sadewa, Analyst – First quarter GDP data is rather weak. Nevertheless, it appears that the economy will not deteriorate further. In fact, there are early indications that it will soon start to pick up its pace again.
In the first quarter of 2009, the economy grew by 4.4 percent year-on-year (yoy) or slightly slower than the 5.2 percent yoy growth in the fourth quarter of 2008 and down from the 6.4 percent yoy growth pace in the third quarter of 2008. The economy has now slowed down in three successive quarters.
Compared to other countries however, Indonesia has been spared the worst of the global economic downturn. Indeed, some economists have predicted that only three other countries besides Indonesia will post positive economic growth this year (China, India and Vietnam).
The first quarter GDP data suggests that the Indonesian economy will continue to grow in 2009.
This upbeat prognosis will boost investor sentiment, boosting Indonesia's attractiveness as an investment destination relative to some neighboring countries whose economies are in disarray.
This helps to explain the stellar performance of Indonesia's capital markets this year (the benchmark JCI has already gained around 53.4 percent year-to-date).
The still respectable GDP growth in the first quarter of 2009 mainly stemmed from higher household spending. In this quarter, household spending grew an impressive 5.8 percent, its briskest growth pace in the last nine years. Note that in the period 2001 – 2008, household spending only grew by 4.2 percent per year on average.
Firm purchasing power on the back of benign inflation in the first quarter of 2009 helped underpin household spending. Spending has also been supported by improving consumer confidence which has risen to positive levels not seen in the last two years.
Other factors supporting consumer spending have been the relatively low interest rates and the spending associated with the campaigning for the general elections which took place in April.
Government spending also helped drive economic growth. In the first quarter of 2009, government spending grew 19.2 percent, or significantly higher than the 3.6 percent growth in the first quarter of 2008. Investment, however, only grew 3.5 percent while exports dropped 19.2 percent compared to the 1Q08 figures.
In normal times, economic growth coming principally from higher domestic consumption would give rise to concerns. However, these are not normal times and the strong domestic consumption should be viewed positively.
Nonetheless, the slowdown in overall economic growth still raises questions as to when the economy will recover and return to a higher growth trajectory.
The Coincident Economic Index (CEI) has depicted weakening economic activity since 2008. This index, which tracks the current state of the economy, comprises five components: the car sales index, the cement consumption index, imports, money supply, and the retail sales index. An increase in the CEI shows brisker economic activity.
The CEI has been on a downtrend since July 2008. This suggests that the Indonesian economy has been slowing since that month. This marked downtrend in the index suggests that the Indonesian economy has slowed severely.
Indeed, the Indonesian economy technically entered a recession in November 2008 (based on the sequential signaling method).
Fortunately, the government and the central bank acted promptly to prevent the economy from deteriorating further. Interest rates have been cut aggressively since December 2008.
Lending rates have not come down as quickly as expected, but the impact has still been positive on the economy. And looking ahead, there are more cuts to come.
The interest rate cuts coupled with relatively firm purchasing power have encouraged consumers to continue spending. As such, household spending grew briskly in the first quarter of the year. This helped the economy to avoid a more severe slowdown.
And by March, the corner appears to have been turned. In this month, economic activity appears to have picked up again (as reflected in the increase in the CEI in March). This is the first time the CEI has increased since September 2008.
Looking ahead, the Indonesian economy will continue to improve, as indicated by the increase in the Leading Economic Index (LEI). The LEI is the index which predicts the direction of the economy from 6 to 12 months ahead.
The Leading Economic Index (LEI) comprises seven components: the building permits index, the number of tourist arrivals, the foreign investment approvals index, the real effective exchange rate, the Jakarta Composite Index (JCI), exports, and the CPI services index.
The LEI fell continuously in the period from January to October 2008. Since then, however, the LEI has stopped falling. And in March the LEI strengthened further. This suggests that the economy will improve in 6 to 12 months time.
The sequential signaling method shows that the Indonesian economy entered a contraction phase in November 2004. But in March 2009, a T1 (first trough) signal was detected, indicating that the economy had reached its lowest point in the downturn.
Thus, the economy stands to pick up its growth rate going forward. In short, the economic prospects over the near term are brighter.
The lending rate is expected to come down with the BI rate. Thus, the declining interest rates will have a bigger impact on the economy in the near future.
Moreover, the realization of government fiscal spending, which has been sluggish in the past, is expected to improve. This will also have a beneficial impact on the economy. We conclude the economic downturn has bottomed out. As such, our economy is bracing for a pick-up in growth in the near future.
[The writer is the chief economist of Danareksa Research Institute.]