ECONOMIC UPDATE - GDP - Stoke the fire of growth

 

2019 GDP securely fixed above 5%

Economic slowdown is unavoidable since Indonesia’s economy is susceptible with the global economic downturn. With the weak demand of Indonesia’s exports in 2019, we see the sluggish trade performance is responsible for the slower growth in 4Q19 at 4.97% YoY. 

However, the growth in full-year 2019 remained solid at 5.02% YoY, higher than consensus’s estimate at 5.00% YoY and ours at 4.98% YoY. The easing tension between US-China trade war, the better Global Manufacturing PMI in last 7 months until the more desirable domestic investment climate stoke the fire of growth in the end of 2019. 

 

Growth reading for 4Q19

Statistics Indonesia (BPS) recorded a slower 4Q19 GDP growth at -1.74% QoQ or marginally slowed down from 5.02% YoY in 3Q19 to 4.97% YoY in 4Q19, the slowest since late 2016. The 4Q19 GDP is equivalent to Rp4,018 tn of nominal GDP and Rp2,770 tn of real GDP. It came pretty much slightly ahead of our estimation of 4.80% YoY. The growth was mainly supported by household consumption and GFCF (investment) which grew by 4.97% and 4.06% YoY. The laggards came from export that grew negatively at 0.39% YoY where in 4Q18 it grew positively at 4.59% YoY in contrast. With the growth, GDP per capita increased to USD4,175/capita in 2019 or 6.31% higher compared to its level in 2018.

 

Consumption to rein the growth

Overall, consumption slowed down from 5.01% in 3Q19 to 4.97% in 4Q19. Robust household consumption is important as it contributed the most at 57.3% to GDP. Food and beverages except restaurant contribution still dominated the household consumption with stable growth around 5.08% over years. Amid the economic slowdown, interestingly, the growth of restaurant and hotel increased at 6.18% YoY (vs. 5.75% YoY in 4Q18). This supports the notion that people tend to shift their consumption habit to spend more on leisure activity. This could bring a little help in the middle of threatened tourism sector due to the corona virus outbreak. Government expenditure contributed 11.4% to GDP and grew 0.48% YoY or significantly decreased from 4.56% YoY in 4Q19. At first, we saw in the end of year, the government would increase its budget absorption thus we expected the growth at 5.63% YoY in order to boost the overall growth. However, considering the widened fiscal deficit at 2.2% to GDP in 2019, the government braked its spending in 4Q19 instead. 

 

All sector grows positively

On yearly basis, every sector grew positively and brought positive sentiment amid the economic slowdown. The biggest share to GDP came from Manufacture (19.6%), Trade (12.9%) and Construction (11.3%) where in 4Q19 they grew at 3.66%, 4.24% and 5.79% YoY, respectively. In terms of growth, the highest growth came from Other Services (10.8% YoY), Company Service (10.5% YoY) and Information and Communication (9.71% YoY).

 

Rate cut call in 1Q20

Chance of recovery is looming for 2020 although some unpleasant phenomenon happened recently such as the rising tension between US-Iran until the corona virus outbreak. On the other hand, US economy shows a downturn as well where US growth in 2019 is 2.3%, the least since 2016 and misses Trump 's 3% target for the second year. The sluggish US growth will favor FFR cut expectation where we expect 50 bps of rate cut this year. It may embolden the appreciation of rupiah but to some extent, the stronger rupiah may bring detrimental effect for Indonesia trade performance. Thus, we see that Bank Indonesia (BI) will have another rate cut in 1Q20 by 25 bps to prevent the backfire on export and ultimately to boost the current weaker growth.