Jalan2Economy: GDP resilient despite lower export growth

Article at The Jakarta Post
By Arga Samudro Economist Bahana Securities 

While lower than our expectation, Indonesia continues to report resilient 1Q12 GDP growth of 6.3% y-y (exhibit 2), held back mainly by exports which continued to weaken to 7.8% y-y compared to 18.5% seen in 3Q11. Domestic demand remained the main economic driver as household spend rose 4.9%, supported by strong wage growth and higher employment levels (unemployment rate dropped to 6.3% from 6.6% in August 2011). Growth in investment was robust at 9.9%, accounting for nearly 26% of GDP (exhibit 4). This was helped by credit growth, low interest rate environment and stable political condition sustaining fixed capital formation.

With the productive nature of investment, we expect support for the domestic economy over the medium term.
By industry, apart from harvesting period that supported the agriculture sector in 1Q12, mining, transportation, construction, electricity, gas and water supplies also experienced the highest growth. Global growth is set to disappoint this year in our view. Thus, as global economic recoveries remain weak, we expect softer external trade.

However, as Indonesia is well insulated given that exports represent just 25% of GDP, the impact of weaker exports on the overall economy should be relatively minimal. Hence, we revise down our full-year 2012 GDP growth to 6.12% from our previous estimate of 6.4% with support still mostly stemming from relatively strong domestic demand and much improved direct investment. Although we expect inflation to reach 5.2% y-y by the end of the year (exhibit 3), we believe household spending should remain resilient, helped by strong demographic dividends.

While April inflation at 4.5% was the highest in seven months, BI is likely to remain focus on economic growth support in its upcoming Thursday monetary policy meeting, particularly given recent drop in commodity prices. This, coupled with the likelihood of a worsening Euro-debt crisis, will likely mean that BI’s policy rate will remain at 5.75% throughout 2012.