Household Consumption Remains Key Engine Economic Growth Indonesia
Eric Sugandi, Chief Economist at SKHA Institute for Global Competitiveness (SIGC), believes household consumption will remain the main engine of economic growth in Indonesia in 2017, followed by the other engines, namely direct investment and government spending. Regarding household consumption, Sugandi says the middle class contributes significantly to economic growth of Southeast Asia's largest economy due to their robust consumption. Traditionally, household consumption accounts for between 55 and 58 percent of Indonesia's gross domestic product (GDP).
From the supply side, the manufacturing sector, agriculture and trade will contribute significantly the the Indonesian economy, Sugandi added. For the future, he predicts that manufacturing, trade, transportation & communication, and construction will be the sectors that are to play a key role toward GDP growth. Therefore, he advises Indonesian authorities to design and implement fiscal and monetary policies that support these four sectors.
Sugandi sees Indonesia's economy growing at a pace of 5.2 percent year-on-year (y/y) in 2017, slightly below the World Bank's 5.3 percent (y/y) projection but accelerating from an estimated 5.0 percent (y/y) growth in 2016 (Indonesia's official 2016 GDP growth figure will be released by the nation's Statistics Agency, known as BPS, in early May 2017). Meanwhile, the Indonesian government set its GDP growth target at 5.1 percent in the 2017 State Budget, in an apparent attempt to over-deliver instead of under-perform.
Regarding Indonesia's consumer price index, Sugandi sees inflation rising from 3.02 percent (y/y) in 2016 (a very low inflation rate for Indonesian standards) to 3.50 percent in 2017. Other institutions and analysts also expect Indonesian inflation to rise in 2017 due to administered price adjustments (specifically higher electricity tariffs).
Bambang Brodjonegoro, Head of Indonesia's Ministry of National Development Planning (Bappenas), agrees and says household consumption and inflation are the keys to unlock further accelerating economic growth in Indonesia. Indonesia will need to safeguard robust growth of household consumption. This component should grow by, at least, 5 percent per year. Meanwhile, in order to make it attractive for consumers to spent their money, the nation needs a stable and low inflation rate as well as high consumer confidence. Both the central and local government have a large role to play to create the right environment for this.
Meanwhile, the central bank of Indonesia (Bank Indonesia) said it expects Indonesia's current account deficit to widen in 2017, although it will remain below 2.4 percent of GDP. Agus Martowardojo, Governor of Bank Indonesia, said the estimate for Indonesia's 2016 current account deficit is 1.8 percent of GDP, smaller than the 2.04 percent deficit recorded in the preceding year.
Macroeconomic Ratios Indonesia:
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017¹ | |
| • Gross Domestic Product² (annual percent change) |
6.2 | 6.0 | 5.6 | 5.0 | 4.8 | 5.0¹ | 5.3 |
| • Consumer Price Index (annual percent change) |
5.4 | 4.3 | 8.4 | 8.4 | 3.4 | 3.0 | 4.0 |
| • Current Account Balance (percent of GDP) |
0.2 | -2.8 | -3.3 | -3.1 | -2.1 | -2.1 | -2.3 |
| • Foreign Exchange Reserves (in billion USD) |
110.1 | 112.8 | 99.4 | 111.9 | 105.9 | 116.4 |
¹ indicates a forecast
² Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
Sources: World Bank, Statistics Indonesia and Bank Indonesia