GDP: It is just a sprained, not a fracture

1Q16 GDP decelerated to 4.92% YoY, lower than our estimate

Below market consensus estimate as well as our projection,1Q16 GDP growth turned to drop to 4.92% YoY (4Q15: 5.04%) with cyclical contraction in quarterly basis at -0.34% QoQ (4Q15: -1.83%). We note that in a normal circumstance, government spending and gross fixed capital formation (investment) often lower than previous quarter as business expansions and government’s budget disbursements just accelerate faster in 2Q.

Slower GDP due to lower-than-expected government spending and investment

It is worth spotting that lower YoY level was due to less contribution from direct investment and government spending realization. Furthermore, relatively in line with our estimate, a slower-than-expected government capital expenditure as well as a modest direct investment realization from domestic and foreign investors paved the way to slightly deceleration in gross capital formation to 5.57% YoY (ours: 5.34%, 4Q15: 6.90%). In addition, 1Q16 real government spending (non-investment) of 2.93% YoY was also lower than our projection (ours: 3.75%, 4Q15: 7.31%). On the flip side, in line with our expectation, real private consumption slightly increased to 4.94% YoY (4Q15: 4.92%), which was backed by accelerated activities in transportation and restaurant. A maintained purchasing power partly caused a higher import demand which brought real imports to -4.24% YoY (4Q15: -8.05%) while a slight improvement in commodity prices contributed to better real exports at -3.88% YoY (4Q15: -6.44%).

1Q16 GDP by sectors: A slack business activities in communication and construction

Industry wise, lower 1Q16 GDP growth was mainly caused by slower activities in construction (7.9% YoY), water supply, waste treatment & recycle (4.8%), information and communication (8.3%), and insurance-financial services (9.1%). We note that most of those sectors had been affected by lower-than-expected government’s capital spending.   

Job market remained resilient despite GDP slowdown

BPS also released biannual job market data for February 2016 reading. Although 1Q16 GDP was disappointing, Indonesia’s February 2016 unemployment rate eased to 5.5% from a year before at 5.81% on the back of surprise pick-up in 4Q15 economic growth.

Expect deterioration should be temporary; A robust pick up may be seen in 2Q16

We are of the view that trending down GDP growth may not be persistent going forward. Slower expansion activities in the beginning of 2016 could be acceptable as business players were still in adjustment over uncertainty from external factors. Looking forward, given a relatively tough domestic demand and supported by higher 2Q16 business and consumer tendency index as were surveyed by BI and BPS, we hope this positive expectation should help the GDP to grow at above 5.0% YoY in 2Q16.