Indonesia's GDP Growth Falls Below 5% to Weakest in a Year

Indonesia’s economic growth slowed last quarter as a spate of factory closures and job cuts weakened consumption, underscoring the challenges facing newly inaugurated President Prabowo Subianto.

(Bloomberg) — Indonesia’s economic growth slowed last quarter as a spate of factory closures and job cuts weakened consumption, underscoring the challenges facing newly inaugurated President Prabowo Subianto.

Gross domestic product expanded 4.95% in the three months through September from a year earlier, the country’s statistics agency announced on Tuesday. That trails the 5% median estimate of 32 economists in a Bloomberg survey and marks the slowest quarterly pace since the 4.94% expansion posted in the same period a year ago.

The rupiah and stocks held losses after the data as traders focused their attention on the upcoming US election. Yields of 10-year and 5-year government bonds were unchanged at 6.78% and 6.68%, respectively.

Prabowo is aiming to boost growth to as high as 8% during his five-year term at the helm of Southeast Asia’s largest economy. He hand-picked on Tuesday several veterans of previous administrations to act as his economic advisers. Former World Bank senior official and Indonesia trade minister Mari Elka Pangestu and ex-Finance Minister Chatib Basri will sit in the newly set up National Economic Council, reporting to Luhut Pandjaitan, a former senior minister who drove Indonesia’s ambitions to become a battery and electric vehicle maker.

“We will maintain growth in the short-term,” Pangestu said after the announcement on Tuesday. “In the medium-term, we will look at how to sustain growth” by implementing Prabowo’s priority programs of food and energy self-sufficiency, and streamlining the budget.

While Indonesia’s growth stands out as among the fastest in the region, the cracks emerging in its manufacturing sector could jeopardize employment and consumer spending that are critical to the $1 trillion economy. 

Labor Pains

Labor-intensive industries, particularly apparel and footwear, have been suffering from a sharp decline in overseas demand and an influx of cheaper imports. The sector has seen a rising number of factory closures and debt distress, such as at textile giants PT Sri Rejeki Isman, also known as Sritex, and PT Pan Brothers.

Job cuts in Indonesia rose by 31% from a year earlier as of October, reaching nearly 60,000, according to previously released labor ministry data. Manufacturing activity has also contracted for four consecutive months, its longest slump since at least 2021, based on the S&P Global purchasing managers’ index.

Today’s data show Indonesia’s unemployment rate fell to 4.91% in August, from 5.32% in the same month of 2023. But the underemployment rate, which captures those working less than 35 hours a week and still accepting side jobs, jumped to 8%, from 6.68% previously. The proportion of full-time workers also fell slightly to 68%.

Many Indonesians have yet to regain formal employment after the pandemic. About 9.5 million people have fallen out of the country’s middle class — a crucial driving force behind domestic consumption that makes up more than half of GDP.

Spending Slowdown

Consumption growth slowed to 4.91% in the third quarter, dragged by weaker spending on footwear, appliances services, housing and household goods, health and education. 

That’s the fourth straight quarter that consumption has struggled to get back to a 5% expansion, indicating weakening purchasing power, said Ahmad Mikail, an economist at PT Sucor Sekuritas in Jakarta, on Tuesday. He expects the trend to continue through the year-end if there is no significant stimuli from the government and the central bank.

Other sectors saw faster growth in the third quarter, with exports at 9.09%, gross fixed capital formation at 5.15%, and government spending at 4.62%. On the production side, transportation and warehousing posted the highest increase at 8.64%, followed by accommodation, food and beverages at 8.33%.

Manufacturing — the industry with the largest contribution to GDP — expanded just 4.72%, led by base metals.

“We expect growth to slow on our measure of activity as lower commodity prices, subdued global demand and tight monetary policy weigh on demand,” Gareth Leather, a senior Asia economist at Capital Economics, wrote in a note on Tuesday.

The government has unveiled a number of measures to support the local economy, including extending tax perks for house purchases and imposing import duties to protect the local market. Bank Indonesia has also started to lower its benchmark interest rate to help bolster spending and investment, though its easing has been put on hold amid currency volatility. It’s also expanded incentives to banks lending to labor-intensive businesses.

Indonesia will need to reorient its industrial policy towards developing export-oriented service industries for the economy to grow beyond 5%, Citigroup Inc. economist Helmi Arman wrote in a note before Tuesday’s data. Refining raw metals onshore — a priority of Prabowo and his predecessor Joko Widodo — has helped boost growth but hasn’t created enough jobs, he said.

“Services exports like tourism are more labor intensive and may generate more FX conversion,” Arman said. “Yet emphasis on this hasn’t yet been seen in the government programs.”

—With assistance from Norman Harsono, Eko Listiyorini, Prima Wirayani, Chandra Asmara and Claire Jiao.

(Adds market reaction in third paragraph, appointments in fourth, comment in fifth, additional data and context from ninth.)