Strong domestic activity makes up for export dip
GDP growth in Q1 2014 was slightly weaker than we had expected, slowing to 5.2% on the year from 5.7% in Q4 2013. The key source of weakness was a 0.8% annual decline in export volumes, reflecting lower exports of minerals, crude oil and oil products. However, both consumer spending and fixed investment have strong momentum, rising by more than 5% on the year in Q1. We also expect public spending to be solid in election year.
Inflation eased to 7.3% in April and May, having peaked at 8.2% in January. We forecast that CPI inflation will fall below the 5.5% upper target in H2 2014. This is a result of favorable base effects from July onwards, as last year’s fuel price hike drops out of the comparison. Lower inflation should help private spending to maintain momentum.
The rupiah has recovered some ground this year after the current account deficit narrowed in Q4 2013 and Q1 2014.
We expect the deficit to continue to shrink, helping to stabilize the rupiah.
We expect domestic activity to underpin medium-term growth, with GDP growth recovering to reach almost 6% by 2015–16. Deeper reform is required, but with opinion divided, the new President, Joko Widodo, may struggle to win a strong mandate for reform. This would result in a less secure consensus, slowing the reforms and limiting 2017–18 growth to nearer 5%.
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President, Joko Widodo