Indonesia’s economy roared back to life in the second quarter, posting its fastest annual growth in 17 years. But the party may already be over.
The 7.07% year-on-year GDP expansion for April through June, reported by Statistics Indonesia on August 5, beat analyst forecasts of 6.57%. On a quarterly basis, the economy grew 3.31%, also topping expectations. Those numbers snapped a string of contractions stretching back to the third quarter of 2020, when the country first slipped into recession.
Exports led the charge. Commodity shipments surged 56% compared to the same period last year. Consumption and investment picked up too, propped up by active government spending. The January-March quarter was revised to a 0.92% contraction, meaning the rebound was real.
But the statistics bureau itself threw cold water on the headline figure. The strong growth was partly due to a low base effect. The second quarter of 2020 was brutally weak, as the pandemic first slammed the economy. Indonesia’s full-year 2020 GDP shrank 2.1% — the first annual contraction since the 1998 Asian financial crisis.
The recovery is now facing a serious threat. A fresh wave of COVID-19 infections swept the country in July. On August 4, Indonesia recorded more than 100,000 COVID-19 deaths in a single day. Total confirmed cases stand at 3.53 million. Health experts say the true number of infections is likely far higher.
The government responded by imposing strict mobility restrictions on Java and Bali, the economic heart of the nation. Those restrictions went into effect in July — right after the Q2 data period ended. That timing is critical. Economists are now warning of a sharp slowdown in the third quarter.
The July restrictions hit the sectors that had just started to recover. Restaurants, retail, tourism, and manufacturing all face renewed limits. Consumer confidence, which had been slowly rebuilding, is fragile. The surge in cases and the return of lockdowns could choke off the consumption and investment that contributed to the Q2 rebound.
Indonesia’s economy is now in a familiar bind. The low base effect that made Q2 look so strong will fade. The third quarter of 2020 was still weak, but not as catastrophic as Q2 2020. That means even a modest slowdown in activity could produce disappointing year-on-year numbers for the current quarter.
The export boom that drove the Q2 rebound may also cool. Global commodity prices, while still elevated, have shown signs of volatility. And the mobility restrictions in Java and Bali could disrupt supply chains and port operations, slowing the shipment of goods.
Government spending remains a wild card. The active fiscal support that helped lift Q2 numbers may need to continue, or even increase, to cushion the blow from the latest wave. But Indonesia’s fiscal space is limited after a year of heavy pandemic spending.
The bottom line: the Q2 GDP data is already history. What matters now is whether the July restrictions can contain the virus quickly enough to allow the economy to reopen again. If not, the recession that Indonesia just escaped could return faster than anyone expected.
