First growth since the pandemic
Indonesia is celebrating the first economic growth since pandemic kicked in from Mar-20. The economy grew in 2Q21 with strongest expansion in more than a decade at 7.07% YoY (3.31% QoQ). It was higher than our estimate and consensus at 5.86% YoY and 6.72% YoY. The substantial growth was due to the low base effect (-5.33% YoY in 2Q20) and the reopening of economy in the form of looser partial lockdown back then. As the people mobility increased in 2Q21, some sectors such as food and beverage, transportation and warehousing and accommodation contributed the biggest growth. This brings positive sentiment to market as Indonesia has crawled out from the recession by definition.
The economic paradox
Despite of the remaining pandemic, the GDP level in 2Q21 was at Rp2,772 tn (USD193.3 bn) or higher than the pre-pandemic level in 2Q19 at Rp2,735 tn (USD190.7 bn). However, no one claims the economy has returned to normal. Indonesia is extending the level-based Restrictions on Public Activities (PPKM) or Indonesia partial lockdown. As of Aug 4th, 2021, the number of confirmed Covid-19 cases has risen by 35,867 from the previous day to 3.53 mn cases. The number of deaths rose by 1,747 to 100,636 while the number of recovered patients rose by 34,251 to 2.91 mn as well. The deaths due to Covid-19 vastly outnumber its national tally bringing Indonesia as the Asia's Covid-19 epicenter. Unfortunately, the true toll could be much higher.
Big role of household consumption
Household consumption still plays the most important role as it contributed 55.1% to GDP. With stable growth around 5.08% over years, food and beverages except restaurant still contributed the most to the household consumption where it grew by 3.89% YoY in 2Q21. All of the household consumption components grew positively where the highest growth came from Restaurant & Hotel (16.8% YoY) and Transportation & Communication (10.6% YoY). However, on quarterly basis, the strongest growth came from Clothing where it grew at 5.16% QoQ due to some big religious days in 2Q21 especially Eid.
Jump of government spending
To jump-start the economy, the government increased its spending by 8.06% YoY (29.1% QoQ) especially through goods expenditure and personnel expenditure. It brought as much as 8.5% of GDP. At first, we estimated the government spending would be lower at 5.49% YoY due to the more selective spending and the low realization of National Economic Recovery (PEN) program budget at 33.9% of its Rp699.4 tn PEN budget until the end of 2Q21. Meanwhile up to Jun-21, the state expenditure grew by 9.4% YoY to Rp1,170 tn (42.5% of target at Rp2,750 tn).
Fade out K-shaped recovery
Overall, only 2 out of 17 sectors that contracted on quarterly basis. It means the majority sectors have succeeded to maintain their recovery in 2Q21. Related to the K-shaped recovery, the sectors slipping on the downward direction in K letter have way flattened. In other words, the recovery has been getting more obvious in 2Q21. Thus, the K-shaped recovery starts to lose its K form as most of the sectors are recovering. In 2Q21, the biggest share to GDP came from Manufacture (19.3%), Agriculture, Forestry and Fishery (14.3%) and Trade (13.1%). In terms of quarterly growth, the highest growth came from Agriculture, Forestry and Fishery (12.9%), Government Administration (10% YoY) followed by Educational Services (6.86% YoY).
BI to hold the rate at current level
The economic woes shall pass. To spur the growth, Bank Indonesia keeps their stance accommodative by hold the policy rate at 3.5% until the end of 2022. Wait and see approach is still used to keep up with the upcoming Fed rate change in 2023. Besides, we see taper tantrum threat is nowhere near. All in all, we will review our estimate on economic growth, but we still maintain our current estimate of the growth at 3.45% YoY in FY 2021 as the pandemic still lurks.
