Lower headline GDP masks firmer domestic demand in Indonesia

JAKARTA - Indonesia’s Q1 GDP came in below expectations, at 5.21% year-on-yeaar compared with 5.72% in Q4 2013, but ANZ Bank points out that the moderation in growth was led by the external sector and Government spending. “Private consumption expenditure and investment growth picked up in Q1 2014, despite election uncertainty and lagged monetary tightening effects (higher borrowing costs),” ANZ says.

Private consumption growth picked up to 5.61% y/y, from 5.25%, while gross fixed capital formation (investment) climbed to 5.1%, from 4.4%.” The slowdown in growth stemmed from Government spending moderating to 3.6%, from 6.5% in Q4,” ANZ says. “In addition, the external sector contributed negatively to growth, from a significant positive the previous quarter. The domestic sector contributed all the positive growth in Q1 2014.”
“This suggests that Bank Indonesia will maintain a tightening bias and the likelihood of rate cuts is low. That said, when the fuel price base effect washes out in July, inflation will fall, and there may be a small window of opportunity to cut rates ahead of further fuel subsidy rationalisation.
“We still assign a low probability to rate cuts as electricity prices will keep core inflation elevated and a stable policy framework is preferred to volatile rates.” www.live.anz.com (ATI).