Indonesia’s economy displayed steady growth in the first quarter, driven by robust domestic consumption, but challenges such as tight monetary policy and export weakness may impact the sustainability of this growth trajectory.
According to Indonesia’s official statistics agency, the country’s economy expanded by 5.11% year-on-year in the first quarter, slightly higher than the previous quarter’s 5.04% growth and in line with economists’ expectations. However, on a quarterly basis, GDP contracted by 0.83% in the first three months of the year, a decline that was largely anticipated.
Amalia Adininggar Widyasanti, acting chief of Statistics Indonesia, noted that Indonesia’s economy grew solidly in the first quarter, with strong contributions from household consumption, investment, and government spending. Analysts had anticipated a boost from election-related spending and the Ramadan festive season.
The manufacturing sector, which constitutes the largest share of GDP, expanded by 4.1% year-on-year in the first quarter. However, the agricultural industry, which accounts for about 12% of GDP, contracted by 3.5%.
The recent tightening of monetary policy by Bank Indonesia, aimed at stabilizing the rupiah, is expected to dampen domestic demand, according to Gareth Leather, senior Asia economist at Capital Economics. Leather also noted that the boost to households’ purchasing power from last year’s low inflation is diminishing, and exports are likely to be hampered by softer global growth and easing commodity prices.
Capital Economics predicts that economic activity will remain weak in the coming quarters, prompting Bank Indonesia to begin easing monetary policy in October.
Muhammad Saifuddin Sapuan, an economist at Kenanga Investment Bank, expressed concern that Indonesia’s economic momentum could slow in the coming quarters due to the impact of the higher-rate environment. If this occurs, achieving Indonesia’s growth target of 5.2% for 2024 may prove challenging.
Goldman Sachs strategists believe that Bank Indonesia will maintain its policy rate unchanged until the third quarter. However, they cautioned that a significant deviation of the rupiah from the central bank’s expectations could lead to another policy rate hike.
Although Indonesia’s economy showed resilience in the first quarter, challenges lie ahead, particularly regarding the impact of tight monetary policy and export weakness. Balancing these factors will be crucial for sustaining economic growth in the coming quarters.
(Source: RTT News | Nikkei Asia)
