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Indonesia: economic growth slows, below 5% for the first time in two years

Indonesia’s economic heartbeat shows signs of slowing down. For the first time in the last two years, the annual growth rate has fallen below the 5 percent threshold, as reported by Statistics Indonesia (BPS). The nation, which has been a beacon of solid economic performance in Southeast Asia, now finds itself facing the headwinds of a global slowdown that has begun to make itself felt across its islands.

In the third quarter of 2023, Indonesia’s Gross Domestic Product (GDP) grew by 4.94 percent year-on-year, a figure that falls short of the government’s optimistic forecast of over 5 percent growth. This deceleration is attributed to a combination of factors, including a slowdown in domestic spending and a reduction in the trade surplus, which collectively have braked the economy’s momentum.

Amalia Adininggar Widyasanti, interim head of BPS, emphasized that domestic consumption, a critical engine of the Indonesian economy, has not kept pace with expectations. “Domestic consumption is lower than in the previous quarter, as it normally peaks in the second quarter,” she explained during a press briefing.

The decline in exports, which deepened to 4.26 percent from 2.97 percent in the second quarter, has also contributed to the slowdown. This is a worrying trend for an economy that has been riding the wave of global trade and raises concerns about Indonesia’s resilience in the face of weakening global growth.

The rupiah, Indonesia’s currency, has been another focal point of economic attention. In response to its depreciation, Bank Indonesia implemented an unexpected rate hike last month, bringing the total rate increases since last year to a substantial 250 basis points. Although this move was aimed at defending the currency, it has raised questions about the balance between monetary tightening and economic growth.

Indonesia: further rate hike expected

“While a rate below 5% is still quite good, this serves as a warning for our monetary authority to not be too aggressive with rate hikes,” commented Myrdal Gunarto, an economist at Maybank Indonesia. He anticipates a further rate hike of 25 basis points, suggesting a cautious approach to monetary policy.

Despite the less encouraging GDP data than expected, the rupiah managed to recover, supported by a weakening U.S. dollar, and gained 1.3% compared to the previous day’s close.

Looking ahead, recent government policy measures, including a tax cut for homebuyers and increased welfare spending, are expected to provide some economic cushioning. The upcoming election campaigns and the associated spending are also likely to inject further vitality into the economy.

Household spending, which accounts for over half of Indonesia’s GDP, has seen its growth rate decelerate to 5.06% from 5.22%. This slowdown reflects the broader challenges that Indonesian consumers are facing, including the impact of domestic interest rate hikes and the global economic climate.

The agricultural sector, traditionally a stronghold of the Indonesian economy, has not been spared either. It has been hampered by drought conditions exacerbated by the El Niño weather phenomenon, which is expected to have reached its peak impact in October.


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