Indonesia’s economy expanded a higher-than-expected 6.4 percent in the second quarter as robust domestic demand offset a decline in the international appetite for its exports.
In the three months ended June 30, Southeast Asia’s largest economy continued to rack up some of the strongest economic growth in the world, as the archipelago’s growing consumer class was relatively unaffected by global debt problems and slowdowns that are dousing demand in many developed countries.
The Central Statistics Agency said Indonesia’s gross domestic product climbed 6.4 percent from a year earlier and 2.8 percent from the previous quarter. The 6.4 percent figure for the quarter beat analyst forecasts, with most expecting growth for the three months to be around 6.1 percent.
“If any country in Asia was going to hold up well in the second quarter, I expected it would be Indonesia, given its strong domestic consumption,” said Kenneth Akintewe, a portfolio manager at Aberdeen Asset Management Asia Ltd
The economic expansion came despite signs that the country’s commodities exporters are being hit by the global slowdown. Indonesia’s exports – which are dominated by natural resources such as coal, palm oil and tin – have been sliding as commodity prices slip and demand from places like China and India have slowed. Indonesia announced last week that it recorded its worst-ever trade gap in June as strong domestic demand boosted imports even as its exports fell.
But more than 60 percent of Indonesia’s GDP comes from domestic demand from the country’s 240 million consumers, which helps insulate the country’s economy. Indonesia has the world’s fourth-largest population after China, India and the US, and consumption accounts for a larger share of the economy there than in many other Asian nations.
Auto makers have just recorded their best month ever in Indonesia, selling more than 100,000 passenger cars in July, more than 15 percent more than they sold here a year earlier. Indonesia’s increasingly affluent middle class was buying new cars ahead of Idul Fitri, the celebration that marks the end of the fasting period of Ramadan, during which millions of Indonesians go back to their home villages and like to show off what they have bought with their rising incomes.
Nissan Motor Co., NSANY +1.25 percent which is spending close to $400 million to more than double its capacity in Indonesia, also had a record July and has been surprised by the resilience of Indonesian demand, said Kintaro Izumida, the president director of PT. Nissan Motor Indonesia.
“The second quarter growth was quite strong even though there is a European economic crisis,” he said. “We assume this momentum is really good for our company.”
Retail sales have been climbing as well. Home improvement store chain Ace Hardware ACEHF -4.38 percent plans to open around two new stores per month for the next 18 months to better target the country’s middle class. It currently has 67 stores in Indonesia.
“We will continue to open new stores because we see a big market potential,” said Imelda Widjojo, spokeswoman for PT Ace Hardware Indonesia.
An important factor behind the GDP rise was household consumption, which grew 5 percent in the second quarter from a year ago, the Central Statistics Agency said. Meanwhile, private investment rose 12.3 percent and government spending rose 7 percent during the same time period.
A presidential order to speed up government spending “seems to have brought some results,” the statistics agency’s head, Suryamin, who like many Indonesians only goes by one name, told a news conference.
The industries that contributed most to the country’s growth were transportation and telecommunications, which were up 10.1 percent on-year, followed by commerce and hotels at 8.9 percent and construction at 7.3 percent.
Economists and executives warn that the country’s overburdened roads, bridges and airports could also eventually slow private investment in the country and trigger inflation. And many still worry about the emergence of a sizable trade deficit, as well as a spate of recent policy decisions that foreign investors say are overly protectionist, potentially hurting investment.
Some analysts and investors have warned that Indonesia could soon look more like India, which is now seeing weaker growth after it failed to adequately respond to years of warnings that its infrastructure was not keeping up with the rapid pace of growth in the subcontinent. Half of India experienced blackouts last week.
Some executives and economists worry Indonesia is coasting on older investments that are helping growth look good today, but could fade later this year or next year, said Sofjan Wanandi, chair of the Employers’ Association of Indonesia – one of Indonesia’s largest business associations.
“Companies will be putting new investments on hold, because commodity prices are cheaper, and government policies are uncertain,” he said. “They are only carrying on with the investment plans they had already committed to in the past one or two years.”
For now, though, “Indonesia remains a reasonably good story,” said Akintewe at Aberdeen Asset Management.