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Interpreting anticipated high growth in the second quarter
Relative improvements in the first two months of Q2 2021 indicate light at the end of the tunnel for economic growth.
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Budget allocation for the national economic recovery (PEN) program (JP/Hengky Wijaya/Dzulfiqar Fathur Rahman)
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ndonesia’s economy was still in the recession zone in the first quarter of 2021. It shrank 0.74 percent year-on-year (yoy) despite the expansive fiscal measures, accommodative monetary policy and the COVID-19 vaccine rollout. The figure marked economic contraction for the fourth straight quarter, yet was the smallest in the sequence amid the ongoing battle against the COVID-19 pandemic.
The increase in daily cases at the start of the year, along with the risk of new virus strains, kept the government imposing restrictions on community activities, particularly those related to travel and recreation. This inevitably restricted public mobility, thus hindering faster economic recovery. As a result, household consumption, which contributes 57 percent of gross domestic product (GDP), kept contracting on an annual basis.
Government spending and exports were two GDP components that helped the economy improve, as they recorded growth in the first quarter. Spending growth was due to front-loading, mainly in relation to accelerating the national economic recovery (PEN) program, including strategic infrastructure projects and vaccine procurement.
Meanwhile, exports were driven by robust external demand, thanks to the better than expected global economic recovery led by the two largest economies in the world, the United States and China, which happen to be Indonesia’s main export destinations. The two countries posted economic expansion in the first quarter, with the US economy expanding 0.4 percent yoy and the Chinese economy jumping by 18.3 percent yoy.
The first two months of the second quarter have passed to indicate a light at the end of the tunnel. The most recent economic indicators, on both the demand and supply sides, suggest that Indonesia may escape the recession. The consumer confidence index (CCI) has slipped back into optimistic territory, rising to a 13-month high of 101.5 in April 2021. It was the first time the CCI hit above 100 since March 2020, the beginning of the pandemic. Moreover, the manufacturing purchasing managers’ index (PMI) spiked to 54.6 in April 2021, in the sixth straight month of manufacturing activity growth and the highest on record.
National spending grew 15.90 percent yoy to April, with government spending rising 28.05 percent yoy, with the greatest yoy rise in goods and capital expenditures at respectively 87.13 percent and 132.35 percent. Exports and imports continued to strengthen, increasing by 51.94 percent and 29.93 percent yoy in April 2021, respectively. The import increase is a positive indicator, since a huge chunk of total imports are input goods (raw materials and capital goods), suggesting that investment and production activities are picking up.
All major components of GDP are hence expected to accelerate in the second quarter. The government has even projected that the economy could expand significantly between 7 percent and 8 percent yoy. This is a rather high growth rate compared to the historical pattern. In the few years prior to the pandemic, the annual growth rate for each quarter hovered at around 5 percent yoy. If the 7-8 percent growth indeed occurs, it will be the strongest annual growth since the fourth quarter of 2004 (7.16 percent yoy).
