Indonesia's recession eases as government boosts spending, exports recover

Indonesia's economy suffered its first full-year GDP contraction in over two decades in 2020.
Indonesia's economy suffered its first full-year GDP contraction in over two decades in 2020.PHOTO: AFP

JAKARTA (REUTERS) - Indonesia's economy shrank for the fourth straight quarter in January-March but at a much more modest pace as the government boosted spending and higher commodity prices helped exports, statistics bureau data showed on Wednesday (May 5).

The outlook, however, is being clouded by continued Covid-19 infections, which are weighing heavily on household consumption, the biggest component of the economy.

South-east Asia's largest economy contracted 0.74 per cent in January-March from the same period a year earlier, in line with analysts' forecasts and compared with a 2.19 per cent contraction in October-December.

But some analysts say activity will take a long time to return to pre-pandemic levels.

"Indonesia's economy struggled to gain any momentum in the first quarter of the year and a failure to contain the virus will hold back the recovery in the quarters ahead," Mr Gareth Leather, Capital Economics analyst, said in a research note.

He noted that the improvement was almost entirely due to a lower base for comparison in the year earlier period, and estimated that the economy barely grew in seasonally adjusted on-quarter terms.

On a quarterly, non-seasonally adjusted basis, the economy contracted 0.96 per cent, compared with a drop of 0.42 per cent in October-December and forecasts of a 1.04 per cent decline.

Consumption, which makes up about half of the country's gross domestic product (GDP), continued to contract as consumers remained reluctant to shell out on big ticket items such as cars, likely due to uncertainties about jobs, Mr Suhariyanto, head of the statistics bureau, told a streamed news conference.

The bureau's survey showed that unemployment numbers in February had decreased to 8.75 million, from 9.77 million in the previous survey in August, but were still higher than February 2020's number of 6.93 million.

Average wage levels have also improved from August, but are still below pre-pandemic levels as well.

"This is one of the reasons why household consumption is not doing as well as we had hoped," Mr Suhariyanto said.

Meanwhile, government spending grew 2.96 per cent growth in the period, Mr Suhariyanto said, as it beefed up social spending.

Indonesia's economy suffered its first full-year GDP contraction in over two decades in 2020 as the pandemic and anti-virus restrictions battered businesses and left millions without jobs.

The government pumped 579.78 trillion rupiah (S$53.7 billion) into the economy to help mitigate the impact of the crisis last year and expanded recovery spending this year to 699.4 trillion rupiah from 403.9 trillion rupiah budgeted at the start of the year.

Indonesia has recorded the highest number of coronavirus infections and deaths in South-east Asia. Cases have been declining since peaking in January, but vaccinations are progressing slowly and the country has reported its first cases of a highly infectious Covid-19 variant first detected in India.

Further economic improvement will very much hinge on how the government can control the spread of Covid-19, said Ms Moekti Prasetiani Soejachmoen, economist at Danareksa.

"Although a vaccination programme has been rolled out, that doesn't mean people will be instantly immune to the virus, so health protocol discipline in the community will very much dictate the economic recovery rate," she said.

The central bank has cut key interest rates by a total of 150 basis points, pumped over $50 billion of liquidity into the financial system and eased lending rules since the pandemic started to help cushion the impact of the outbreak.

Bank Indonesia expects the economy to grow by 4.1 per cent-5.1 per cent this year. It trimmed its view last month from a previous forecast of 4.3 per cent-5.3 per cent, saying consumption was not recovering as fast as initially expected.