IMF Cuts Outlook for Economic Growth in Indonesia & World

Maurice Obstfeld, Economic Counsellor and Director of the IMF's Research Department, informed the press at the World Economic Outlook press conference on Tuesday morning (09/10) that global economic growth is expected to remain steady over 2018-2019 with a growth rate of 3.7 percent year-on-year (y/y).

It is a growth forecast that exceeds global GDP growth realization in any of the years between 2012 and 2016. Meanwhile, many economies have reached - or are nearing - full employment, while earlier deflationary fears have eased. Thus, policymakers around the globe still have an excellent opportunity to build resilience and implement growth‑enhancing reforms.

Despite the still upbeat outlook for the world economy, the 3.7 percent (y/y) growth forecast is a downward revision from the 3.9 percent (y/y) outlook in the April 2018 edition of the IMF's WEO. Obstfeld said that recent developments since April have made a 3.9 percent (y/y) growth rate look "overoptimistic".

Global growth has proven to be less balanced than had been hoped by the IMF. Not only have some downside risks that the last WEO identified been realized, but also the likelihood of further negative shocks to the IMF's growth forecast has risen. Moreover, in a number of key economies growth is being supported by policies that seem unsustainable over the longer term. These concerns raise the urgency for policymakers to act.

Growth in the United States, for example, is buoyed by a pro‑cyclical fiscal package. This encourages a rapid economic growth pace and is driving US interest rates higher. However, once parts of its fiscal stimulus go into reverse, then US economic growth is bound to slow down. Meanwhile, the recently enacted tariffs on a wide range of imports from China - as well as China's retaliation - are expected to undermine US growth in 2019.

The IMF also cut its forecast for China's growth in 2019 although domestic Chinese policies are likely to prevent a larger growth decline. However, these policies come at the cost of prolonging internal financial imbalances.

IMF's Forecast for Indonesia's Economic Growth

Meanwhile, in line with the downward revision of its global economic outlook, the IMF also cut its outlook for Indonesia's GDP growth. Growth in Southeast Asia's largest economy is now expected to reach 5.1 percent (y/y) both in 2018 and 2019. This is a significant downward revision considering the IMF had its forecast for Indonesia's economic growth at 5.3 percent (y/y) in 2018 and 5.5 percent (y/y) in 2019 in the April edition of the WEO. Key reasons are monetary policy decisions in several of the top economies, simmering trade concerns, and rising crude oil prices.

Regarding the fragile rupiah, which has depreciated more than 10 percent against the US dollar so far this year, Obstfeld said "it is important to realize that that the gradual tightening of monetary policy in the US, the approach of more tightening in the Euro area, and the general tightening of financial conditions facing emerging markets throughout the world is a common factor that a number of countries are contending with. It is actually a matter of US dollar strength, not rupiah weakness. One way to gauge this is to note that even though the rupiah has depreciated 10 percent against the US dollar this year, its depreciation on a weighted effective basis against its trade partners is only four percent. So one does not want to exaggerate that extent of the issue."

On Tuesday (09.10), the Indonesian rupiah weakened 0.21 percent to IDR 15,249 per US dollar according to the Bloomberg Dollar Index.

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