Indonesia's Economy Posts Slowest Growth In Two Years As Exports Fall

Indonesia's economy logged solid growth in the third quarter, although it slowed more than expected to its weakest in two years as exports shrank and household spending softened.

Gross domestic product grew 4.94 per cent annually in the July-September quarter, below the 5.17 per cent growth logged in the second quarter and short of the 5.05 per cent predicted by economists.

Economists widely expect Southeast Asia's largest economy to cool this year due to a slew of domestic interest rate hikes, falling commodity prices and weakening global growth.

A surprise rate hike from Bank Indonesia last month, aimed at defending the falling rupiah currency, has taken total rate increases since last year to 250 basis points.

"While a sub-5 per cent rate is still quite good, this serves as a warning for our monetary authority to not be too aggressive with rate hikes," said Maybank Indonesia economist Myrdal Gunarto, who expects one more rate hike of 25 bps.

Despite the disappointing GDP data, the rupiah on Monday extended gains to trade 1.3 per cent up from the previous day's close as the US dollar softened.

For the current quarter, spending on election campaigns and the government's recent increase in the welfare budget will provide some cushion, said Joshua Pardede, chief economist at Bank Permata, predicting full-year 2023 growth at 5.07 per cent. 

The government last month launched a policy package that included a tax cut for homebuyers, an extension of rice handouts and additional cash handouts. Presidential candidates and political parties will start campaigning for the Feb. 14 general elections later this month.

In a news conference after the GDP release, Finance Minister Sri Mulyani Indrawati said the government will expand its tax break on property purchases to bolster growth through 2024.

She also revised slightly the official GDP outlook for all of 2023 to 5.04 per cent from 5.1 per cent in her previous forecast, with next year's growth seen at 5.24 per cent.

That compares with economic growth of 5.3 per cent in 2022 - the highest level in nine years when resource-rich Indonesia benefited from a global commodity boom.

In the July-September period, the contraction in exports deepened to 4.26 per cent from 2.97 per cent in the second quarter, with government spending also falling on a yearly basis.

Growth in household spending, which represents over half of GDP, decelerated to 5.06 per cent from 5.22 per cent.

The agriculture sector was also hampered by drought brought on by the El Nino weather pattern, the data showed. The impact of El Nino is expected to have peaked in October.

One bright spot in the GDP breakdown came from investment, which recorded 5.77 per cent growth in the third quarter, versus 4.63 per cent in the second quarter.

On a non-seasonally adjusted quarter-on-quarter basis, Indonesia's GDP expanded 1.6 per cent, below expectations for 1.71 per cent growth.