Downside surprise: Indonesia's GDP growth hits 5-year low in Q2

Government spending slump fueled the slowdown.

Indonesia’s second quarter GDP growth proved to be a real shocker. Growth in the Southeast Asian economic powerhouse slumped to a five-year low in after notching a disappointing5.1% growth in Q2, .

According to a report by OCBC Economist Wellian Wiranto, the market will have to familiarize itself with the idea that Indonesia’s growth has been stuck in a rut and will not be recovering in the near future.

“Looking at the components, the slump in government spending stood out the most. Various cutbacks by the government in recent months – in its attempt to save money to fund ballooning subsidies – have been unwarranted in view of the slowdown, and have indeed contributed to the downside surprise in Q2 headline growth. While making up just 7% of total GDP, the 0.7% yoy drop in government spending nonetheless resulted in a net drag on headline growth by 0.1ppt, when every little bit counts,” noted the report.

Here’s more from OCBC:
Elsewhere, while net exports bounced back into making a positive contribution to growth (by 1.3ppt versus Q1’s -0.1), it has been driven more by a deep cut in imports rather than resurgent exports. Indeed, on its own, exports were still a net drag on headline growth by half a percentage point.

Meanwhile, courtesy of election year political uncertainties, business investment activities are yet to show any strong momentum as decision makers appear reluctant to commit to huge undertakings just yet.

Last but definitely not least, let us zoom in on private consumption – the long-time bulwark of Indonesia’s growth story.

Here, the fact that it has stayed fairly strong, adding 3.0ppt to headline growth, just a tad lower than the 3.1ppt of Q1 elicit a bit of mixed feeling.

On one hand, a super slump in consumption would have rung many an alarm bell among investors used to the assumption that Indonesians would spend and shop come what may.

On the other hand though, there is the reality that Indonesia needs not just a slower growth, but more precisely a slower private consumption growth at this point to arrest its current account deficit issue due to the hefty import component in consumption.