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Domestic spending carries Indonesia GDP through weak global economy

Jakarta Post - May 7, 2024

Deni Ghifari, Jakarta – Buoyed by elevated domestic consumption during the Islamic festive season and the presidential election, Indonesia's economy again exceeded market expectations as it posted gross domestic product (GDP) growth of 5.11 percent year-on-year (yoy) in the first quarter.

Finance Minister Sri Mulyani said in a press statement released on Monday that the quality of economic growth was "increasing significantly", given that the unemployment rate had dropped below the pre-pandemic level.

"Amid global uncertainty, Indonesia's economy continued to show resilience," the minister said following the publication of the GDP report, before promising that the government would make use of the state budget to maintain economic stability and push growth higher.

Her statement claimed that household spending was mainly driven by low inflation and increased economic activity during Ramadan, as well as by Idul Fitri bonuses and civil servant pay raises.

The economic growth figure marks an increase from the 5.04 percent logged in the fourth quarter of 2023 as well as in the first quarter of 2023.

It also came in higher than the 4.9 percent forecast from Moody's Analytics and a 5 percent consensus forecast from economists polled by Reuters.

Interim Statistics Indonesia (BPS) head Amalia Adininggar Widyasanti revealed on Monday that domestic consumption made up 54.93 percent of the country's GDP in the first quarter. That share has steadily grown since 2022.

"The increase of the [household spending] share is in line with people's rising purchasing power," Amalia said.

She detailed that household spending in preparation for the festive season of Ramadan and Idul Fitri, as well as government spending ahead of the election, had "boosted" overall consumption.

She went on to say that 5.11 percent was the highest first-quarter growth figure the country had reached since 2014.The BPS report shows that GDP – which measures the total value of goods and services produced nationwide – dropped to Rp 5,288.3 trillion (US$330 billion) in the first quarter from Rp 5,302.5 trillion in the fourth quarter of 2023 in a typical seasonal effect observed over the years.

Economic output jumped from the first to the second quarter in each of the past three years, and then declined gradually over the following quarters. Most of the Islamic festive period also fell into the second quarter during those years.

Even though the country has maintained a trade surplus for nearly four years, during which the value of exports exceeded that of imports, cross-border trade weighed on GDP growth in the first quarter of 2024 as the surplus over the first three months of the year weakened when compared to the same period of 2023.

Every sector of the economy posted yoy growth, except for agriculture, which contracted by 3.54 percent in a decline blamed on harvest disruption prompted by the El-Nino climate phenomenon.

Correspondingly, agriculture lost some 240,000 workers from February 2023 to February this year, while it continues to employ more people than any other sector.

The largest sector in terms of economic output is manufacturing, which alone accounted for just shy of a fifth of the country's economy in the first quarter, followed by trade.

As BPS also announced on Monday, the unemployment rate dropped significantly to 4.82 percent in February from 5.32 percent in August last year. That figure was below the 4.94 percent reading posted in February 2020, before the pandemic shook the domestic economy.

Private lender Bank Permata chief economist Josua Pardede wrote in an analysis released on Monday that Indonesia was facing internal and external pressure in the first half of 2024.

Internally, risks lay in food inflation caused by El-Nino, which consequently might impact household spending. Moreover, the transition to a new government is also causing uncertainty that "may lead investors" to take a "wait-and-see" approach and therefore affect capital expenditure.

The risk of a global economic slowdown, on the other hand, continues to loom as an external threat for Indonesia, Southeast Asia's largest economy.

Josua noted that "growth opportunities exist" if the government can accelerate national strategic projects (PSN) and the Nusantara Capital City (IKN) megaproject.

"Moving into the second half of 2024, as the election [and transition period] conclude and the potential for global policy rate cuts materializes – albeit not as extensive as initially anticipated – external pressures are expected to gradually diminish. Consequently, a resurgence of direct investment and capital inflows is anticipated," said Josua.

He predicted full-year GDP growth of around 5.07 percent.

Bank Danamon economist Irman Faiz placed his bet at 5 percent flat for the entirety of 2024, citing weaker global and domestic demand thanks to a hawkish interest rate "environment".

In his assessment, the growth improvement in the first quarter was "mostly driven by one-off factors", namely the election, heavy social security disbursement as well as Ramadan taking place earlier than last year.

Source: https://asianews.network/domestic-spending-carries-indonesia-gdp-through-weak-global-economy