24 January 2020 (closed)
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In full-year 2017 the Indonesian economy expanded 5.07 percent year-on-year (y/y). Indonesia's Statistics Agency (BPS) announced on Monday morning (05/02) that the nation's gross domestic product (GDP) growth reached 5.19 percent (y/y) in the fourth quarter of 2017. These figures show a mixed picture.
On the one hand it is positive that Indonesia's GDP growth is continuing to accelerate. In fact, the 5.07 percent growth figure is the nation's fastest full-year GDP growth figure since 2013. Moreover, the 5.19 percent (y/y) growth figure in Q4-2017 is the best Q4 GDP growth figure since 2013.
Also positive is that Indonesia's nominal GDP reached IDR 13,558 trillion, or USD $1 trillion using the 2017 exchange rate. This puts Indonesia in the USD $1 trillion economy group of nations.
On the other hand, the pace of accelerating economic growth of Southeast Asia's largest economy goes very slow: from 4.9 percent (y/y) in 2015 to 5.0 percent (y/y) in 2016, and followed by 5.1 percent (y/y) in 2017.
Household consumption is an important component to watch because it accounts for about 56 percent of Indonesia's economic growth. Growth of household consumption remained stuck below the 5 percent (y/y) mark: 4.95 percent (y/y) in FY-2017 and 4.97 percent (y/y) in Q4-2017. Bleak household consumption is often cited as reason for Indonesia's sluggish economic growth in recent years. Despite falling interest rates, consumers remain hesitant to spend on various items, such as cars, homes, and such. Moreover, Indonesia's retail sales grew just 2.6 percent (y/y) in December. Analysts claim that the Indonesian consumer now prefers to safe his/her funds on a bank account rather than spending it.
There is an alarming trend regarding Indonesian household consumption (visible in the table below). Over the past couple of years household consumption growth in Indonesia has been sliding (and stagnating since 2015).
Indonesia's Household Consumption Growth 2013-2017:
(annual % change)
Source: Statistics Indonesia (BPS)
Suhariyanto, Head of BPS, said the three biggest sources of economic growth in 2017 were the manufacturing sector, construction, trade, and agriculture.
Meanwhile, investment growth picked up in Q4-2017. Gross domestic fixed capital formation grew by 7.27 percent (y/y) in the last quarter of 2017. Amid bleak household consumption Indonesian President Joko Widodo has high hopes for investment realization. Therefore, the government has been opening several sectors to foreign direct investment in recent years and has been eager to improve the nation's investment climate (for example through deregulation).
Another positive development is that Indonesia's export performance has improved on the back of rising commodity prices and improving global demand.
However, the 5.07 percent (y/y) GDP growth realization in 2017 was below the 5.2 percent (y/y) GDP growth target that was set by the Indonesian government in the Revised 2017 State Budget. Moreover, there are serious doubts whether any significant accelerating economic growth can be expected in the next couple of years, particularly in case Indonesia's household consumption remains bleak.
Indonesia's Quarterly GDP Growth 2009-2017 (annual % change):
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
What Factors Will Support Indonesia's Economic Growth in 2018?
- Fitch Ratings upgraded Indonesia's sovereign rating to the second-lowest investment grade in December 2017. This attracts capital inflows
- Commodity prices are strengthening, hence boosting Indonesia's export performance
- The Indonesian government's infrastructure development push attracts direct investment
- Local elections will boost the circulation of money in the regions
- The central government plans to boost spending
What Factors Will Obstruct Indonesia's Economic Growth in 2018?
- Monetary tightening in the USA and other big economies can trigger capital outflows from emerging markets, including Indonesia
- Indonesia's household consumption remains bleak
- Tax revenue realization is likely to miss the target (as usual). This could make the government decide to cut spending
- There could emerge rising pressures on the Indonesian rupiah due to monetary policy in the USA
- Indonesian inflation may rise due to rising crude oil and fuel prices
Projections Indonesia's GDP Growth in 2018:
|International Monetary Fund (IMF)||5.3%|
|Asian Development Bank (ADB)||5.3%|