According to the World Bank the economy of Indonesia will continue to accelerate in 2017 supported by strengthening global economic growth, overall rising commodity prices (meaning investment and export performance should improve), the nation's low current account deficit, low inflation, and strong fundamentals of the Indonesian economy. These circumstances should boost Indonesia's gross domestic product (GDP) growth to 5.2 percent year-on-year (y/y) in 2017 (from 5.0 percent in the preceding year).

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In line with expectations, Indonesia's inflation rate accelerated in February 2017, particularly due to higher prices in the category "housing, water, electricity, gas and fuel". On Tuesday (01/03) Statistics Indonesia announced that Indonesia's annual headline inflation rose to 3.83 percent (y/y), up from 3.49 percent (y/y) in the preceding month. On a monthly basis, Indonesian inflation was recorded at 0.23 percent (m/m), the highest monthly February inflation figure since 2014.

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Bank Indonesia, the central bank of Indonesia, is concerned that the ongoing flooding that occurs in several regions of the country will give rise to inflationary pressures as some distribution channels are blocked. Besides logistics issues, severe rainfall can disturb harvests hence impacting negatively on the supply-side. In several parts of Indonesia, including the capital city of Jakarta and the northern part of Central Java, there are reports of major floods.

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On 5 February 2017, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve political, social and economy-related topics such the Jakarta gubernatorial election, Indonesia's GDP growth, inflation, manufacturing activity, the investment climate, palm oil, coal, and much more.

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The International Monetary Fund (IMF) is optimistic about economic growth of Indonesia in the foreseeable future. In its latest report the Washington-based institution says Indonesia's solid economic policies and increased household consumption support strong growth. The stronger rupiah and low inflation have caused people's purchasing power to strengthen. This is a major positive boost for the economy as household consumption accounts for more than 55 percent of total economic growth in Southeast Asia's largest economy.

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We already expected Indonesia's inflation rate would be high in January 2017 due to higher food prices as well as higher administered prices (electricity tariffs, fuel prices and vehicle registration fees). However, inflation realization in the first month of 2017 exceeded our expectations. Indonesia's statistics bureau (BPS) announced around noon on Tuesday (01/02) that the nation's monthly inflation accelerated to 0.97 percent (m/m) in January 2017, while annual (headline) inflation rose to 3.49 percent (y/y).

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Indonesia's consumer price index is expected to rise in January 2017 amid higher food prices and higher government administered prices. Indonesian inflation in the first month of 2017 is estimated in the range of 0.60 - 0.70 percent month-on-month (m/m). Accelerating inflation in Southeast Asia's largest economy would imply that Indonesia's central bank (Bank Indonesia) has limited room to ease its monetary policy (by cutting the benchmark interest rate).

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Eric Sugandi, Chief Economist at SKHA Institute for Global Competitiveness (SIGC), believes household consumption will remain the main engine of economic growth in Indonesia in 2017, followed by the other engines, namely direct investment and government spending. Regarding household consumption, Sugandi says the middle class contributes significantly to economic growth of Southeast Asia's largest economy due to their robust consumption. Traditionally, household consumption accounts for between 55 and 58 percent of Indonesia's gross domestic product (GDP).

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Indonesia's Deposit Insurance Agency (LPS) expects Indonesian inflation to reach 4.7 percent year-on-year (y/y) in full-year 2017, just within the central bank's 3 - 5 percent (y/y) inflation target. Didiek Madiyono, Executive Director of the LPS, said administered price adjustments will be the primary reason why the inflation rate of Indonesia will accelerate from 3.0 percent (y/y) in 2016 to 4.7 percent (y/y) in 2017. Administered prices are those prices that are set by the government. Usually when the government changes its subsidy policies, it needs to adjust certain prices.

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Most analysts and government officials see Indonesian inflation accelerating this year after a mild 2016 in which Indonesia's consumer price index rose by 3.02 percent year-on-year (y/y) only. Indonesian Chief Economics Minister Darmin Nasution said low inflation in 2016 was primarily caused by low administered price growth (in a couple of months administered prices in fact fell last year) as well as controlled food prices. He added, however, that food prices have been rather volatile and are expected to remain volatile in 2017.

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The Consumer Confidence Index of Indonesia rose 0.9 percent in September 2013 after having fallen 8.4 percent in the previous month. In September, the index rose because Indonesian consumers are more confident about prospects of the Indonesian economy, while concerns about the increase of certain food prices eased. Purbaya Yudhi Sadewa, chief economist at the Danareksa Research Insititute, said that in September 77.4 percent of consumers were concerned about rising food prices, down from 82.5 percent in August.

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Growth rates in Indonesia in 2013 and 2014 will fall below earlier projections, highlighting the need to continue improving the country’s competitiveness in manufactured exports, says the Asian Development Bank (ADB) in an update of its flagship annual economic publication, Asian Development Outlook 2013. ADB revised down its 2013 gross domestic product (GDP) growth forecast for Indonesia to 5.7% from 6.4% seen in April. For 2014, growth will also be adjusted to 6.0% from the previous estimate of 6.6%.

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It seems clear now how market conditions will be until the end of the year. Two important foreign issues - the US Federal Reserve's tapering of quantitative easing (QE3) as well as the US debt ceiling issue which resulted in a shutdown as the Democrats and Republicans failed to come to an agreement on the country's federal budget - and various economic data from Indonesia (inflation and the trade balance) have provided some more insight into the matter. I will discuss each topic one by one below.

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After three months of high monthly inflation rates, Indonesia's inflation eased in September due to falling prices of food, transportation, communications and financial services after the Muslim celebrations of Idul Fitri, which always cause a spike in inflation, have passed. In September 2013, Indonesia posted deflation of 0.35 percent. It was the first time in 12 years that the country posted deflation in this month. The annual inflation rate eased to 8.40 percent from 8.79 percent in August 2013.

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Inflationary pressures eased in September 2013 to a 0.35% rate of deflation (mtm), or 8.40% (yoy). The rate of deflation exceeded the projections contained within the Price Monitoring Survey conducted by Bank Indonesia and much lower than inflation expectations by some analysts. Abundant supply in the wake of horticultural harvests (shallots and chilli peppers), triggered a deep correction in food prices. In addition, sliding beef prices also exacerbated further deflationary pressures, with volatile foods recording deflation of 3.38% (mtm).

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On this week's second day of trading (01/10), the benchmark stock index of Indonesia (IHSG) was able to post a 0.69 percent rise to 4,345.90 points despite ongoing concerns about the economic shutdown in the United States as discussions have not led to agreement about the country's debt ceiling. However, various data from Asia made a good impact. Indonesia's trade surplus in August and deflation in September contributed to positive market sentiments and provided a boost for the rupiah.

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Investors are eagerly waiting for the release of Indonesia's September inflation rate. Indonesia has been hit by high inflation since the government decided to increase prices of subsidized fuels at the end of June. High inflation limits its people's purchasing power and as domestic consumption accounts for about 55 percent of Indonesia's economic growth, it thus impacts negatively on GDP growth, particularly after Bank Indonesia raised its benchmark interest rate (BI rate) from 5.75 to 7.25 percent between June and September.

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The slowdown of Indonesia's economic growth is expected to continue into the third quarter of 2013. The Indonesian government predicts that economic growth will fall below the GDP growth figure realized in the second quarter (5.8 percent). Acting Head of the Fiscal Policy Agency Bambang Brodjonegoro stated that the main factor that causes the country's slowing economic growth in Q3-2013 is reduced household consumption. Domestic consumption in Indonesia accounts for about 55 percent of the country's GDP growth.

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Indonesia's central bank, Bank Indonesia, expects deflation of about 0.9 percent in September 2013. Statistics Indonesia, on the other hand, believes there will be limited inflation this month. Both institutions agree, however, on a forecast of at least 9 percent of inflation over full-year 2013. The bank's September forecast is based on a survey that was conducted in the second week of September. This survey showed that food commodities and government administered prices eased.

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Starting from May 2013, Indonesia's benchmark stock index (IHSG) has been on a weakening (bearish) trend inflicted by various reasons. First, in early May, Standard & Poor's downgraded Indonesia's credit rating due to the government's hesitancy to slash fuel subsidies. Then, the Federal Reserve started to speculate about ending its quantitative easing program. Capital outflows that followed indicated the vulnerable state of the Indonesian economy. Moreover, the controversial hike in fuel prices in late-June resulted in high inflation.

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