Although, overall, Indonesia's gross domestic product (GDP) growth in the third quarter of 2017 was slightly disappointing at a pace of 5.06 percent year-on-year (y/y), investment, export and government consumption all strengthened. Hence, the main reason why Indonesia's Q3-2017 GDP growth was below expectations is sliding growth of household consumption.
Based on data from Statistics Indonesia (BPS), investment growth in Indonesia (gross fixed capital formation, GFCF) reached 7.11 percent (y/y), the highest level in four years. This improvement may very well be related to the improving ranking of Indonesia in the World Bank's Ease of Doing Business, where Southeast Asia's largest economy jumped from 91st to 72nd this year. Moreover, the government has been eager to improve the investment climate through deregulation.
Another positive matter is that Indonesia's import and export performance improved markedly. Indonesia's exports surged 17.27 percent (y/y), while its imports surged 15.09 percent (y/y) up to the third quarter of 2017. These are great figures considering the nation's import and export experienced contractions over the past three years. The improving export performance is primarily attributed to rising commodity prices (specifically prices of coal and crude palm oil). In terms of export volumes, however, there has not been a significant improvement, hence global demand for Indonesian commodities has not strengthened significantly yet.
Meanwhile, government spending rebounded by expanding 3.46 percent (y/y) in the third quarter of 2017, accelerating after a near 2 percent contraction in Q2-2017. The Indonesian government has particularly been trying to boost spending on infrastructure development across the Archipelago as this would cause the multiplier effect and encourage structural economic and social growth. Moreover, the availability of high-quality infrastructure would also attract more private investment.
The key to unlock significantly accelerating economic growth is a recovery in household consumption (household consumption accounts for slightly over half of Indonesia's GDP). According to a Bank Indonesia official it is particularly the lower middle class segment that is reluctant to spend their money.