Indonesian economic growth decelerates slightly in Q2, BI likely to cut policy rate further

Indonesian economic growth decelerated a bit in the second quarter from the first quarter. On a year-on-year basis, the GDP growth slowed to 5.05 percent from prior quarter’s 5.07 percent. This is the softest reading in two years.

The breakdown of GDP showed a sharp acceleration in government spending growth, while private consumption also edged up. Although exports continued to decline, a sharper fall in imports signified that net export growth picked up in the month.

Nevertheless, investment growth eased slightly further to its slowest pace in nine quarters, while inventories were a bigger drag on growth in the second quarter relative to the first quarter as the inventory build-up decelerated further.

Private consumption is expected to stay strong and provide a considerable support to growth, noted ANZ in a research report. Consumer sentiment has held up well, and spending on social assistance has risen sharply year-to-date. In the meantime, inflation is not expected to be a major headwind to consumers’ purchasing power.

Nevertheless, soft prices for Indonesia’s key commodity exports such as coal, palm oil, and LNG pose a challenge. Weak export revenues are expected to restrain investment, the government’s revenues, and worker’s incomes. Accordingly, the growth is expected to remain below the midpoint of BI’s full-year 2019 growth projection of 5 percent to 5.4 percent projection.

However, weak prices for Indonesia’s key commodity exports such as coal, palm oil, and LNG pose a challenge. Subdued export revenues will constrain investment, the government’s revenues, and (potentially) workers’ incomes. Accordingly, growth is likely to stay below the midpoint of BI’s full-year 2019 growth projection of 5.0-5.4% projection.

“Accordingly, we continue to expect BI to lower its policy rate by a further 50bps in the current easing cycle, following a 25bp rate cut at its meeting last month. However, the timing of its next move will be dependent on rupiah stability, and the recent volatility in the rupiah suggests a move at its meeting later this month is not on the cards”, added ANZ.