UBS Economics-APAC Economic Perspectives _Indonesia Growth beat, now what...-117059720

ab5 August 2025Global ResearchAPAC Economic PerspectivesIndonesia: Growth beat, now what? Stronger-than-expected Q2 rebound, upgrade '25 GDP forecast to 4.9%Q2 GDP growth accelerated to a two-year high of 5.12% y/y, marking a sharp turnaround from a four-year low of 4.87% in Q1. This was the biggest upside surprise since Q2'22, exceeding UBS and consensus expectations of a growth slowdown by a margin of 0.2/0.3ppt. (UBSe/Cons: 4.9%/4.8%). Sequentially, the economy grew at a faster pace of +1.5% q/q sa (5.9% annualized), vs. 1.2% q/q sa (4.8% annualized) in Q1. This was narrowly based, led by investment (particularly of machinery & equipment), which rose 6% q/q sa and contributed 1.8ppt to q/q growth. On the other hand, government consumption, net exports, and inventory accumulation slowed on a q/q basis. Household consumption was steady at 5% y/y (1.4% q/q sa), defying expectations of a slowdown. Factoring in the upside surprise, and a potential fiscal spending ramp-up in H2, we upgrade our 2025 GDP growth forecast for 2025 to 4.9% (from 4.7%). This presumes growth slows to 4.9% in H2 2025, from 5.0% in H1 2025. We still expect BI to cut rates twice more in 2025, in September and December. Surge in investment not wholly unexpected, but pace likely to taper Gross fixed capital formation accelerated to 7.0% y/y in Q2, up from 2.1% in Q1, the fastest expansion since 2021. This was driven primarily by machinery & equipment (+25.3% y/y, or +20% q/q sa). Building investment (+4.9% y/y, +5.1% q/q sa), also recovered from a weak Q1. The spike is consistent with data from capital goods imports, which shows a surge in imports of capex equipment that are related to the commodity sector. Investment is likely to normalize in the following quarters, bearing in mind that machinery & equipment investment is fairly volatile and the surge came after a weak Q1 (-0.7% q/q sa). For H1 as a whole, investment is up 5.2% y/y, in line with our view of a replacement cycle driven uptick in investment, as portended by strong investment loan growth last year. BI also said last month (link) that Q2 growth was underpinned by non-building investment related to activities in the transportation sector. Consumption resilience correlates weakly with higher-frequency indicatorsHousehold consumption was 4.9% y/y in Q2, unchanged from Q1. Spending on goods (food +4.1% y/y, clothing & footwear +2.9% y/y), remained subdued, whereas spending on services, including restaurants & hotels +6.8% y/y and transport & communications +6.5% y/y, was resilient. This appears at odds with higher frequency data in consumer sentiment, retail sales, consumer goods imports, and slowing consumer loan growth, which showed increasingly weak monthly momentum through the quarter. Household consumption in the national accounts tends to have a low standard deviation, and quarterly variability has declined since 2024. While this may limit the informational content of national accounts data in ass