The global economic recovery continues to gain momentum but the risk of volatility still remains
The global economic recovery continues to gain momentum but the risk of volatility still remains.
The current conflicts in Ukraine and Iraq have driven the World Bank to cut its global growth forecast in 2014 to 2.8 percent or much lower than their January forecast of 3.2 percent. Developed economies will be the main drivers of global growth and trade while developing countries will experience a slowdown in the next period.
It is worth noting that the World Bank expected the advanced/high-income countries to accelerate further to 1.9 percent this year and 2.4 percent in 2015 while developing countries will grow at a stable level of 4.8 percent this year, unchanged from the 2013 performance.
In detail, China will still be the main risk among developing countries due to its poor performance and persistent deceleration since 2011 when it achieved economic growth of 9.2 percent (compared to 10.4 percent in 2010). In the next five years, China is expected to grow at around 7 percent on average or much lower than its average growth in the last 15 years of 9.6 percent.
China's economic growth could possibly be supported by the economic recovery in the US economy, which is expected to grow at around 2.8 percent. The US is China's main trading partner accounting for 17 percent of total exports, slightly higher than the 16 percent contribution from the EU. Despite below market expectation economic growth in the first quarter of 2014, the US is still expected to recover this year and accelerate further next year.
The current global economic development has affected the volatility in developing countries, especially Indonesia. It is worth highlighting that China's economy has a larger impact on Indonesia's economy. Every 1 percent drop in China's economy will have an impact on Indonesia's economy of 0.33 percentage points (ppt) while a 1 percent drop in the US economy will drag down Indonesia's economy by only 0.11 ppt.
However, the US economic recovery is still a positive factor for Indonesia's export performance in two ways: (i) the US recovery will create higher demand for Indonesia's exports of manufactured products, such as apparel and clothing (contributing 25 percent of total nominal exports to US), and electrical machinery (7 percent); (ii) the indirect impact of higher Chinese exports to the US, which will lead to higher demand for Indonesia's commodity products.
However, the government's policy of banning raw ore exports will exert further pressure on export performance and slow the momentum of the Indonesian economy.
Indonesia's economic performance in the first quarter of 2014 was evidence that poor export performances dragged down economic growth. In that period, consumer spending grew quite significantly at 5.6 percent, but exports contracted by 0.8 percent year-on-year (y-o-y), leading to gross domestic product (GDP) growth of 5.2 percent.
Export performance will still be the main source of downside risk to Indonesia's economic growth as we expect the trade imbalance to persist for the next two months during Ramadhan and Idul Fitri, before improving entering the third quarter of 2014.
Based on historical data, imports tend to increase on average by US$1 billion before returning to their normal level post the festive season. Thus the magnitude of imports will depend on the direction of capital-goods imports, which will mainly be driven by the rebound in investment.
At this juncture we believe that tight monetary policy and a weakening rupiah will limit capital-goods imports. Our plantation analyst also suggests that crude palm oil (CPO) prices this year will remain within the range of $900 ' $950 per ton despite the possibility of unfavorable weather (El Niño) in the second half of 2014.
Last week, the Central Statistics Agency (BPS) published May 2014 trade data that showed a small surplus of $70 million. It was a positive sign following a surging deficit of $2 billion in April, mainly driven by the deeper contraction of imports on a yearly basis.
The latest trade surplus should provide some hope that the full-year trade performance will be much better than last year given the fact of a better global economic outlook. However, we should note that slower imports, partly affected by the tighter monetary policies, also played an important role in Indonesia's trade surplus.
May's trade data confirmed that the import decline was dominated by capital-goods imports, in line with our view of a moderation in investment this year.
Furthermore, an upward risk will come from the inflation figures post the approval of a second round of electricity price increases. Based on our calculations, the overall contribution of the first and the likely second round of electricity hikes to inflation will be around 0.5 ppt.
Hence, we expect the inflation rate to reach 5.5 percent this year or much higher than our previous forecast of 5.3 percent. On a monthly basis, the inflation will still be higher in June and July in the middle of Ramadhan.
Going forward, we believe that political certainty following the election will support Indonesia's economy to accelerate further through continuously strong consumer spending and a better investment performance.
We believe Indonesia's economy will grow by 5.3 percent in the second quarter of 2014 and 5.4 percent in the second half of 2014, bringing the full-year economic growth to 5.3 percent.
Our Mandiri Leading Economic Index also suggests that economic growth in the second quarter of 2014 will improve and remain stable from then on.
In sum, a clear direction and a quick execution of infrastructure projects will build confidence for investors to invest in Indonesia despite the current downward trend of economic growth.
____________
The writer is a senior economist at Bank Mandiri
Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.
Thank you for sharing your thoughts. We appreciate your feedback.