INDONESIA GDP RELEASE: Q2 20181  Indonesia’s economy expanded 5.3 percent yoy in Q2, higher than the 5.1 percent growth posted in Q1, the highest growth in more than 4 years, partly on the back of holiday festivities.  Private consumption growth picked up to a four-year high of 5.2 percent yoy, from 5.0 percent in Q1.  Government consumption growth nearly doubled to 5.3 percent from 2.7 percent in Q1, partly due to base effects of a contraction in the same quarter last year.  Growth of gross fixed capital formation eased for the first time in nine quarters, decreasing from 7.9 percent yoy in Q1 to 5.9 percent in Q2. Investment in building and structures weakened, while machine and equipment investment remained robust, posting double-digit growth.  While both exports and imports accelerated in Q2, imports still grew faster than exports, leading to a continued drag on overall GDP growth.  On the supply side, agriculture, mining and quarrying, and the retail sectors2 provided the largest increase in the contribution to growth, with growth strengthening to 4.8 percent, 2.2 percent and 5.3 percent, respectively. The Indonesian economy grew the fastest in more than four years at 5.3 percent yoy in Q2, above consensus forecasts of 5.1 percent, after posting a Q1 growth also of 5.1 percent. On a qoq seasonally adjusted annualized basis, growth strengthened to 5.5 percent from 5.1 percent in the previous quarter3. The pickup in GDP growth was driven by stronger growth in domestic demand, particularly private and government consumption (Figure 1). Change in inventory contributed 1.0 percentage points (pp) to GDP growth as companies restocked. On the supply side, the commodity sectors (agriculture and mining and quarrying sectors) as well as the retail sector provided the largest additional contribution to growth, while growth in the manufacturing and construction sectors weakened, in line with the slower investment growth (Figure 2). Private consumption growth finally picked up to 5.2 percent in Q2 (Q1: 5.0 percent) after nearly three years at an average of 5.0 percent, lifted by relatively subdued inflation and holiday festivities. Underlying the strengthening of private consumption, which accounts for more than half of GDP, was firming growth of consumption on food and beverages, as well as transportation and communication (the largest contributors to growth of 1.9 pp and 1.3 pp, respectively). Restaurant and hotel consumption continued to grow the fastest at 5.7 percent in Q2. In line with stronger consumption growth, high- frequency indicators for consumption, such as motorcycle sales, passenger car sales, retail sales and consumption credit growth all strengthened in Q2 (Figure 3). Government consumption growth jumped to 5.3 percent from 2.7 percent in Q1, partly due to a base effect of a contraction in the same quarter last year. Aside from a low base effect, government consumption rose due to a robust growth in nominal social spending (67.6 percent), and nominal personnel spending growth (12.6 percent). For the first time in nine quarters and despite stronger commodity prices, fixed investment growth weakened to 5.9 percent from 7.9 percent in Q1, mostly due to softening activity in building and structures investment, that made up three quarters of total fixed investment. Buildings and structures investment remained the main contributor to overall investment growth, despite its contribution shrinking from 4.7 pp in Q1 to 3.8 pp in Q2 (Figure 4). Meanwhile, investment in vehicles slowed to 8.0 percent, in line with moderating growth of commercial vehicle sales. The weaker investment growth was also because of a slowdown in public investment, as nominal capital government spending contracted 13.0 percent in Q2, partly due to the base effect of large infrastructure outlays last year. In addition, the festive period that wholly fell in Q2 resulting in fewer working days, affecting the investment activity during the quarter4. Both exports and imports grew faster compared to Q1, but imports still expanded faster than exports, which led to a drag from net export growth. Exports growth accelerated to 7.7 percent in Q2, while imports growth climbed to 15.2 percent. The acceleration in exports growth was partly due to stronger oil and gas exports growth in line with higher oil and gas prices (Figure 5), which rebounded growing 5.9 percent after a 6.9 percent contraction in Q1. The stronger growth in 1 Prepared by Indira Maulani Hapsari, cleared by Frederico Gil Sander and Derek Chen. 2 The retail sector refers to Trade, Hotels and Restaurants. 3 Quarter-on-quarter, seasonally adjusted and annualized rates. World Bank staff estimates using X12 seasonal adjustment. 4 Although the number of official holidays in Q2 2018 and Q2 2017 was approximately the same, many workers take two weeks leave following Lebaran. Half of this leave period fell in Q3 in 2017, but in 2018 it was entirely in Q2. imports was also driven by a robust turnaround on oil and gas imports growth (Figure 6) of 7.1 percent from a 15.0 percent contraction in Q1. On the supply side, the commodity-related sectors (both agriculture and mining and quarrying sector) and the retail sector posted the largest increases in the contribution to growth in Q2, while growth in the manufacturing, transportation and communication as well as construction weakened (Figure 2). Growth in agriculture sector growth strengthening to 4.8 percent, partly due to a better harvest on more favorable weather conditions. Mining and quarrying sector also continued to pick up with growth rising from 0.7 percent in Q1 to 2.2 percent in Q2 as global commodity prices kept climbing. The retail sector also grew faster, with growth reaching 5.3 percent, in line with the pickup in private consumption. Meanwhile, reflecting a softening investment activity, particularly in building and structures, the construction sector slowed to 5.7 percent in Q2 from 7.4 percent in Q1. Figure 1: Stronger consumption offset the weakened Figure 2: Commodity related sector and retail sector grew investment and drag of net export growth faster (contributions to growth yoy, percentage points) (contributions to growth yoy, percentage points) Change in inventories Stat. discrepancy Other services Financial services Net exports Investment Transport & communication Trade, hotels & restaurants Government consumption Private consumption Construction Electricity, gas & water 8 GDP Manufacturing Mining & quarrying Agriculture Gross Value Added* 5 6 4 4 3 2 2 1 0 0 -2 Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 -1 Jun-15 Jun-16 Jun-17 Jun-18 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Note: *Gross Value Added is derived as the sum of the value added in the agriculture, industry and services sectors. If the value added of these sectors is calculated at purchaser values, gross value added at factor cost is derived by subtracting net indirect taxes from GDP. Figure 3: High-frequency indicators on consumption Figure 4: Growth in building and structures investment presented strengthened trend softened but machinery and equipment investment growth was robust (contributions to growth yoy, percentage points) (yoy, percent/3mma yoy, percent, LHS; consumer confidence index; RHS) Consumer Buildings & Structures Machine & Equipment 30 130 Vehicles Other Equipments Confidence Index Cultivated Bio. Res. Intellectual Property Investment 20 120 8 Motorcycle sales 7 6 10 110 5 Retail Sales Index 4 0 100 3 2 Passenger Car -10 Sales 90 1 0 -1 -20 80 Jun-17 Oct-17 Feb-18 Jun-18 -2 Jun-15 Jun-16 Jun-17 Jun-18 Source: BPS; World Bank staff calculations Source: BI; World Bank staff calculations Note: Retail sales index in yoy percent terms; vehicle sales in 3-month moving average (mma) percent yoy terms. Figure 5: Acceleration in exports growth came from higher oil Figure 6: Similarly, the stronger growth in imports was also and gas exports growth due to stronger oil and gas imports growth (contributions to growth yoy, percentage points) (contributions to growth yoy, percentage points) 20 Services Services Goods: Oil & Gas 20,0 Goods: Oil & Gas Goods: Non-Oil & Gas Goods: Non-Oil & Gas 15 Export of Goods and Services Import of Goods and Services 15,0 10 10,0 5 5,0 0 0,0 -5 -5,0 -10 Jun-15 Dec-16 Jun-18 -10,0 Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Table 1. Indonesia: GDP Growth Q2 2017 – Q2 2018 yoy, percent contributions to yoy growth, percentage points Q2 Q3 Q4 Q1 Q2 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2018 2018 2017 2017 2017 2018 2018 GDP 5.0 5.1 5.2 5.1 5.3 By Expenditure Consumption 4.1 4.8 4.8 4.8 5.2 2.6 3.0 3.2 3.0 3.2 Private cons. 5.0 4.9 5.0 5.0 5.2 2.7 2.7 2.8 2.8 2.9 Govt. cons. -1.9 3.5 3.8 2.7 5.3 -0.2 0.3 0.4 0.2 0.4 Gross fixed capital formation 5.3 7.1 7.3 7.9 5.9 1.7 2.2 2.4 2.5 1.9 Exports 2.8 17.0 8.5 6.1 7.7 0.6 3.3 1.8 1.3 1.6 Imports 0.2 15.5 11.8 12.7 15.2 0.0 2.7 2.4 2.5 2.8 Change in inventories 0.8 -51.7 -15.4 13.8 44.0 0.0 -1.3 0.2 0.4 1.0 By Industry Agriculture 3.2 2.8 2.2 3.3 4.8 0.4 0.4 0.2 0.4 0.6 Mining & quarrying 2.1 1.8 0.1 0.7 2.2 0.2 0.1 0.0 0.1 0.2 Manufacturing 3.5 4.8 4.5 4.6 4.0 0.8 1.0 0.9 1.0 0.8 Electricity, gas and water -2.1 4.9 2.5 3.3 7.3 0.0 0.1 0.0 0.0 0.1 Construction 6.9 7.0 7.2 7.4 5.7 0.7 0.7 0.7 0.7 0.6 Trade, hotel & restaurant 3.9 5.3 4.7 5.0 5.3 0.6 0.9 0.8 0.8 0.9 Transport & communication 10.1 8.8 8.6 8.5 7.2 0.9 0.8 0.8 0.8 0.7 Financial services 5.6 5.9 4.9 4.7 4.2 0.5 0.5 0.4 0.4 0.4 Other services 2.6 4.0 6.8 6.0 6.8 0.2 0.4 0.7 0.5 0.6 Taxes & subsidies 24.4 7.1 14.0 9.1 12.9 1 0.3 0.6 0.3 0.5 Source: Statistics Indonesia, World Bank staff calculations