First-quarter growth eases on slowing domestic demand - Danamon | Outlook Data
(Insider Stories) - Indonesia’s economy grew 6.02% in the first quarter of the year, its slowest pace in more than two years and comparing with 6.11% in the fourth quarter of last year, highlighting the impact of inflation on the domestic consumption that is the economy’s major driver. The economics team at Indonesian lender PT Bank Danamon (IDX:BDMN) forecast full-year growth to come in at 6.17%, slightly below 6.23% growth last year and below the government’s target of 6.8%. The following is some analysis from Bank Danamon on the growth figures and their implications for markets.
Economic Highlights
Real GDP in 1Q13 grew at 6.02%yoy (1.41%qtq), slightly lower than our forecast and the consensus. The first quarter’s economic growth was at its slowest pace since September 2010. The downside was more on the domestic demand as the main driver of the economy, particularly on the slowing down of investment growth pace.
Private consumptions growth slightly eased amid the rising pressure of inflation, but we do not expect this to be persistent. Even if the government raised the subsidized fuel price, consumption would slowdown further but may only last for about two quarter. Furthermore, it should be cautioned by rising spending in preparation for the general election. Pressure on domestic consumption should also be limited by the better absorption of the labor market, as reflected in the open unemployment rate that have declined below 6% (currently stands at 5.92%).
Surprisingly, government consumption recorded a small positive growth above our expectation. This is most likely caused by higher spending on the regional elections despite the low budget absorption due to a stricter administration requirement.
Fixed investments growth is slowing despite the robust investment data (BKPM) in 1Q. Low physical investment realization is shown from the slowdown of the construction sector (grew by 7.19%yoy down from 7.8% pace in the previous quarter) and the negative growth of the imported machineries (-0.07%yoy). Early indications have been seen in the slowing cement sales and the declining imports of capital goods.
Net exports unexpectedly improved, grew by 17%yoy, mostly driven by the sharp drop in imports pace. Declining global commodity prices have dragged down exports. However, imports falls deeper as consumption and economic activities slows.
No significant change in the growth structure of the industries, main drivers are still the tertiary sectors which have the biggest contribution to the economic growth. Transportation and communication sector maintain its resilience, growing at 10%yoy, followed by the financial sectors. Agriculture sectors improved quite significant as harvesting season arrives. Mining sectors still depressed with no signs of recovery in the commodity price. Non oil and gas manufacturing sector slowed, particularly food and textiles, though still cushioned by growth in metal, steel and vehicles industries.
Policy and Market Implications
Stalled global recovery, rising inflation has led the 1Q economic growth to slow faster than expected. If the parliament approval on the revised state budget and compensatory cash transfer is going well, we could expect the subsidized fuel price will be raised in June. If we assume a 22% hike in the fuel price, the inflation rate could go slightly above 7%, which will eventually affect consumption and growth. That said, we revised down our full year economic growth forecast this year at 6.17%yoy. Commodity prices rebound may happen later this year, thus we expect an improving growth in the next year, 2014 at 6.49%yoy.
Easing domestic demand would have a positive side that is reducing the pressure on the imports side. In other word, we should not overly worry as external adjustment is taking place, thus we should expect an improvement in the current account deficit figure this quarter.
Growth slowdown amid rising pressure on inflation would have been the focus in the next central bank’s monthly meeting. Under the current uncertain fuel policy, we believe the central bank will maintain the BI rate at 5.75% for now though we do not rule out a possible rate hike, if the subsidized fuel price is raised. However, any rate hike will be gradual and limited as inflation pressure will recede, and the economy would still need the support of a low rate environment to weather the impact of the stalled global recovery.
