Using the Hodrick-Prescott filter method, we find that the gap between actual and potential output is only about 1 percent. This means that pushing growth to 6 percent or higher risks overheating the economy.

Over the past decade, Indonesia's average growth has been just 5.07 percent (excluding during the 2020-2022 pandemic). Can we try to push it higher than that?

Well, hold on. As we enter the second quarter of 2024, we expect the economy to grow by only 4.94 percent, reflecting a slight deceleration from the 5.11 percent achieved in the first quarter.

This anticipated slowdown can be attributed to several interrelated factors that collectively temper the pace of economic expansion. Bank Indonesia (BI) raised its benchmark interest rate to 6.25 percent in May 2024 to maintain parity with the United States Federal Reserve’s fund rate and counter the ongoing depletion of foreign exchange reserves amid mounting tensions. However, this move, while essential for maintaining parity, could dampen domestic borrowing and investment, thereby slowing economic growth.

The slowing demand can be seen in Indonesia’s annual inflation rate, which fell to 2.84 percent in May, lower than expected. This decline reflects slower demand post-Idul Fitri and a delayed harvest period. While lower inflation typically boosts purchasing power, the current scenario points to lagging consumption.

The subdued inflation figures, driven by reduced price pressures in communication, financial services and food, indicate a broader economic slowdown. This softer inflation environment, while beneficial in some respects, highlights underlying weaknesses in consumer demand that could impede achieving higher growth targets.