ECONOMIC UPDATE – GDP
Starts to Heat
Economic growth picked up to the highest level in Jokowi administration so far
Statistics Office (BPS) reported Indonesia’s 2Q18 GDP growth picked up to 5.27% YoY while the quarterly growth came in at 4.22% QoQ. These came above our estimation and Bloomberg consensus (see table on left) and brought GDP growth in 1H18 to 5.17% YoY, higher than 1H17 at 5.01% YoY.
Major improvement from consumption, more equal growth driver (see page 5 onwards)
The growth driver in 2018 was more equal as consumption growth picked up and investment growth weaken. Consumption growth surprised us with 5.14% YoY growth in 2Q18 or the highest since 2013. Almost the entire components in consumption posted higher growth in 2Q18 than in 2Q17 and 1Q18. Food and beverages, which had the largest proportion in consumption, registered 5.38% YoY growth in 2Q18. Restaurant and hotel component had the highest growth in consumption at 5.71% YoY while other goods which are usually bought during Lebaran like clothes, only saw 3.86% growth. It denoted people preference shifts to leisure during the Lebaran holiday, especially considering longer holiday during Joko Widodo’s administration. However, we do not think the higher purchasing power came from better labor condition after we found that labor absorption still low (exhibit 5) and proportion of part time worker increased (exhibit 6). It is government populist spending that helped to boost people purchasing power. Meanwhile, investment growth was weaken to 5.87% in 2Q18 after experience above 7% growth period in 3Q17 – 1Q18. The declining growth mainly driven by lower investment in buildings which growth was down to 5.02% YoY from its position in 1Q18 at 6.16% YoY. Vehicle growth also declined from 14.4% in 1Q18 to 8.01% in 2Q18. Only investment in machine growth that remained high at 22.5% YoY, in line with the capital goods growth in 2Q18 at 36.1% YoY. We view longer holiday during Lebaran 2018 season became one of the main reason of lower investment growth in buildings. Moreover, we also believe that oversupply in property sector, especially in office buildings played a part in lower growth. Imports grew 15.17% YoY, higher than 1Q18 growth at 12.75% YoY. Higher import was in line with higher domestic demand, showed by higher consumption growth, especially approaching Ramadhan month and also Lebaran festive. However, export growth cannot compensate as it only grew 7.7% YoY.
GDP by sectors: weak growth from agriculture and manufacture (see page 11 onwards)
Industry wise, the main source of growth came from services sector especially trade and transportation. Agriculture output grew 4.76% YoY in 2Q18, making the 1H18 agriculture sector output increased by 4.05% YoY. In our view, this number is quite disappointing as it made 1H18 growth figures was lower than 1H17 at 5.07% YoY. We predict lower agriculture output in the 1st semester may lead to more volatile food inflation in 4th quarter. Furthermore, Indonesia manufacturers cannot take benefit from better domestic consumption environment as it only posted 3.97% YoY growth in 2Q18. Sectors that have high proportion in manufacture posted weak growth like coal and oil & gas at 0.26% YoY (2Q17: 0.01% YoY), chemical industry at -2.13% YoY (2Q17: 8.77% YoY), electronics industry at 0.47% (2Q17: 4.44%YoY) and transportation manufacture industry at 3.10% (2Q17: 0.65% YoY). Only food and beverage industry, which had the highest proportion of manufacturer (31.8% proportion), that posted a strong growth at 8.66% YoY. In our view, lagging manufacture growth to GDP showed that Indonesia’s economic structure relies more on imported products to fulfill domestic demand.
GDP growth at 5.3% in 2018
We expect consumption to remain positive in 3Q18 at around 5.1% due to Asian Games and IMF-WB meeting and 4Q18 at around 5.0%. We predict global volatility will have significant effect to investment next year while its effect to investment in this year will be modest. The loan growth in July even reached more than 11% according to central bank data, implying the future of investment growth in 2018 still positive. Import growth will remain strong in 3Q18 but it will decelerate in 4Q18 due to rosy outlook of investment in 2019 considering 100 BPS rate hike this year and Rupiah depreciation. We maintain our forecast of 5.3% growth in 2018.