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JAKARTA (TheInsiderStories) – Indonesia growth outlook is constrained by sluggish consumer spending, according to ICAEW. However, growth is still expected to pick-up modestly to 5.1% in 2017, due to the robust government spending and investment.

ICAEW continues to forecast growth of 5.3% in 2018 for Indonesia, against a broad-based but mild slowdown in the South-East Asia region. Stronger investments and external demands have supported real GDP growth marginally to 5.1% year-on-year in Q3 2017, from 5.0% in the previous quarter.

Fixed investment growth is pushed to a four year high of 7% from higher private sector investment spending and a pick-up in fiscal spending on public infrastructure projects. Net exports contributed 0.7 percentage points to headline growth, with export volumes growing 17.3% year-on-year, the fastest pace since 2011, while imports increased by 15.1%.

Government consumption has also reversed the weakness seen in Q2 and grew 5.3% in Q3 of 2017. However, consumer spending has been lackluster so far this year, with private consumption growth failing to gather pace in Q3 and remaining steady at 5%.

On the positive side, consumers are expected to benefit from lower borrowing costs gradually feeding through into the economy in the quarters ahead. Moreover, a partial recovery in commodity prices is positive for a country such as Indonesia that is highly dependent on commodity exports.

“With inflationary pressures contained, we do not perceive any imminent risk of monetary tightening. CPI inflation is likely to stay within the central bank’s target range of 2.5% to 4.5% in 2018,” said Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist.

Sian said: “We expect that the firmer terms of trade will bolster household incomes and support private consumption. We forecast spending to grow by 5% in 2017, followed by a small pick-up to 5.1% in 2018,”

An additional silver lining is the positive outlook for FDI. Earlier this year, Indonesia has had its credit outlook ratings upgraded by both Moody’s (from ‘positive’ to ‘stable’) and S&P (from BB+ to BBB-). These developments should spur investment inflows. Various policy packages announced by the government last year should help to restore investor confidence in Indonesia and lift FDI further – which weakened noticeably in 2015.

On the other hand, there are early signs of slower momentum in the trade front, in line with the ease in global trade growth into 2018 due to cooling import demand from China. Although import volume growth has picked up implying stronger domestic demand, ICAEW remains cautious given the volatile nature of the monthly trade data. Export volume growth eased to 5.9% in October, from an average of 9.6% in Q3.

Mark Billington, ICAEW Regional Director, South-East Asia, said: “We forecast a slightly faster growth of 5.3% for Indonesia in 2018, but the outlook is dampened by the recently released budget plans. The government aims to lower the fiscal deficit to 2.2% of GDP next year from a revised target of 2.9% for this year. While we think that the fiscal deficit target is ambitious, it does pose some downside risks to our 2018 growth forecast. A better political backdrop and a stronger pick-up in domestic demand are required to push growth towards 6%.”

Other findings in the report includes:

From a stellar 2017 to a resilient 2018 for South-East Asia

2017 has been a great year for South-East Asia’s economic performance. The region is on track to clock 5% growth for the first time in four years, with almost all countries expected to grow at a much faster pace compared to 2016. Several factors have contributed to this year’s robust performance, namely the boosted outlook for world growth resulting from fewer concerns about rising trade protectionism and continued resilience in domestic demand, in part supported by accommodative macro policies.

Inflationary pressures in some South-East Asian countries, particularly Malaysia and Philippines, have risen in line with the benign global reflation that is taking place as a result of improving growth, recovering world trade and higher commodity prices. In other countries, high leverage and financial stability risks have raised the need for policy normalisation, as growth has picked up. The policy backdrop is unlikely to turn highly restrictive for growth, with fiscal policy partly picking up the slack.

Overall, South-East Asia is forecast mild GDP growth slowdown in 2018 to 4.7% from 5% this year, as trade growth cools in tandem with gradual slowdown in China, and as domestic monetary policies begin to tighten.

Bright economic growth prospects in Malaysia, backed by increased exports and total investment​​

Malaysia marked its strongest rise in annual growth since 2014, defying expectations in Q3, and accelerating to 6.2 year-on-year, up from 5.8% in Q2. Sequentially, headline GDP growth also rose to 1.8% quarter-on-quarter compared to 1.3% in Q2. Aside from government consumption, all other GDP components increased.

While private consumption moderated for the second consecutive quarter, growth was still solid at 0.7%. Against the expectation that headline inflation will moderate to 2.9% next year from an estimated 3.8%, Bank Negara will likely start normalising rates with a 25bps hike in Q1 2018, with a possibility for an increase in the Statutory Reserve Ratio.

Looking ahead, domestic demand and the external sector are expected to moderate albeit growth will remain firm. Domestic demand is expected to remain the key driver of growth supported by solid labour market conditions and investment, notably in infrastructure spending funded both domestically and through foreign direct investment flows.

On the external front, the synchronized recovery in global growth will continue to be supportive of exports, but momentum is likely to slowdown over 2018 as global trade recovery eases and Chinese import growth cools as a reflection of some modest tightening in monetary policy.

Given less favorable base effects, a moderation in export growth, and slighter tighter credit conditions, Malaysia’s 2018 GDP growth is forecast to ease back to 5.1% from an estimated 6% in 2017.