UBS Economics-APAC Economic Perspectives _Indonesia Growth dips below 5 ...-111360846

ab5 November 2024Global ResearchAPAC Economic PerspectivesIndonesia: Growth dips below 5% as labour market concerns surfaceGrowth slipped below 5% for the first time in a yearIndonesia's GDP expanded 4.95% y/y in Q3 2024 (Cons/UBSe: 5.0%/5.0%). The 0.1ppt growth deceleration from 5.05% y/y in Q2 was the first time in four quarters that growth was sub-5%. Sequentially, the economy expanded by +0.9% q/q sa (3.7% annualized), slower than in the first half of 2024 (1.3% q/q sa, 5.3% annualized). Alongside an uptick in the unemployment rate, household consumption momentum slowed further. On the other hand, government consumption picked up, and investment accelerated alongside faster corporate loan growth. This was also reflected in higher capital goods imports, resulting in net exports' contribution to growth turning into a small negative drag. Investment gained momentum, net exports became a dragIn real terms, gross fixed capital formation accelerated to 5.1% y/y (vs . 4.4% in Q2 and 3.8% in Q1)—sequentially investment growth picked up to 3.2% q/q sa vs. 1.5% q/q sa in Q2. Machinery & equipment GFCF expanded strongly by 11.2% y/y; buildings investment by 6.0% y/y. Imports of capital goods surged by 14.6% y/y vs. 7.8% in Q2. We expect stronger real investment growth of above 6% y/y in 2025, supported by easing financial conditions and robust bank lending to corporates in our base case of a US soft landing. However, if macro headwinds (exchange rate and interest rate uncertainty) persist, there is downside risk to our expectations. Export growth picked up slightly to 9.1% y/y vs. 8.2% y/y in Q2, while import growth went up to 11.5% y/y vs 7.8% y/y in Q2. Net exports contributed -0.1ppt drag in Q3 vs. +0.2ppt to growth in Q2. Weaker consumption growth amidst worsening labour market conditionsHousehold consumption growth stayed flat at 4.9% y/y for the third consecutive quarter, while its sequential momentum slowed further to 1.0% q/q sa (vs. 1.2% in Q2 and 1.5% in Q1). Labour market conditions remain weak, and wage growth is subdued. For instance, the semi-annual published unemployment rate was 4.92% in August 2024, vs. 4.82% in February this year. Average wage growth was just 2.8% y/y in August'24 vs. 3.3% y/y in Feb'24 and 3.5% y/y in Aug'23. Although the sector employment data doesn't show a marked decline in manufacturing employment— which was still up 3.5% y/y in Aug'24, wage growth in the manufacturing sector is weak (just 1.3% y/y), amidst mass layoffs in the manufacturing sector (abt 24k this year). The government has recently focused its efforts on this front. Coordinating Minister for the Economy announced plans to roll out incentives to attract investment to labour-intensive sectors, but with not much details at this point. BI remarked in its last policy briefing that macroprudential liquidity incentives would favour labour-intensive sectors going forward. We expect BI to cut another 50bp in 2024 and 125bp in 2025Along with the ri

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2024-11-18
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