Recession looms for Indonesia after slowest growth since 2001

Indonesia’s economy grew at its weakest pace since 2001 in the first quarter, as the coronavirus pandemic halted business activity in Southeast Asia’s largest economy and heightened expectations of a looming recession.

The coronavirus crisis has hit consumption – the main driver of the economy – investment and vital commodity exports, although Indonesia’s growth pace was still higher than in some countries in the region.

Gross domestic product (GDP) in January-March expanded a slower-than-expected 2.97 percent from a year earlier, the weakest pace since the first quarter of 2001, statistics bureau data showed, and down from the previous quarter’s 4.97 percent.

A Reuters poll had a median forecast of 4.04 percent, but some analysts had expected far weaker growth.

Indonesia’s main stock index pared gains to trade up 0.25 percent by the midday break, after rising as much as 1.4 percent earlier. The rupiah appreciated slightly to 15,030 to the dollar.

The economy held up relatively better in the first quarter because Indonesia locked down parts of the country later, said Capital Economic’s senior Asia economist Gareth Leather, who sees a sharp contraction in the second quarter.

“The lockdown will need to remain in place for a while longer yet. Failure to contain the virus would have significant implications for the economic outlook,” Leather said.

The world’s fourth-most populous country first detected coronavirus cases in early March and began closing schools and offices later in the month to contain its rapid spread.

It has reported 11,587 infections and 864 deaths, though authorities hope Indonesians would be able to resume normal activities by July.

Bank of America’s economist Mohamed Faiz Nagutha said Indonesia may enter its first technical recession since the Asian financial crisis by the second quarter.

He said first-quarter data would likely show a contraction when seasonally adjusted and forecast a near minus 5 percent quarter-on-quarter plunge in April-June.

Bank Permata’s economist, Josua Pardede, sees a recession by the third quarter if Indonesia extends its partial lockdowns and the government’s stimulus does not work quickly enough.

Finance Minister Sri Mulyani Indrawati has flagged a risk of recession and a full-year GDP contraction of 0.4 percent, but said authorities were working to prevent this.

Further rate cuts

Economists say the data signals a need to cut interest rates further.

Standard Chartered and Jakarta-based Bank Danamon predict cuts of 50 basis points in total for the rest of the year.

Bank Indonesia has lowered rates six times since 2019 and pumped money into the financial system, while the government has expanded its fiscal deficit to the biggest in more than a decade to fund spending on healthcare, welfare and stimulus.

Airlangga Hartarto, Indonesia’s top economic affairs minister, said the government was maintaining its 2.3 percent annual growth target for 2020.

“There is a shock in the demand side, especially in the second quarter as the government decided on large scale social restrictions to cut the spread of COVID-19,” he told an online briefing.

In January-March, household consumption, which accounts for more than half of the GDP, registered a growth of just 2.84 percent, compared with about 5 percent in recent quarters.

Investment and exports also weakened, growing 1.7 percent and 0.24 percent, respectively.

Hartarto said Indonesia’s COVID-19 taskforce was preparing an “exit strategy” to allow factories to run under stricter health protocols so some businesses can restart production.

The statistics bureau said as of February Indonesia’s unemployment rate barely changed from a year earlier, but job advertisements indicate a widespread drop in hiring.