Indonesia pulled out of recession in the second quarter, reporting its strongest annual growth rate in 17 years, but analysts warned its economic recovery will suffer a setback due to a recent surge in COVID-19 infections.

Southeast Asia’s largest economy grew 7.07% in the April-June quarter compared with a year earlier, its first expansion in five quarters, Statistics Indonesia reported on Thursday (Aug 5).

The pace was stronger than the 6.57% growth expected in a Reuters survey of analysts, and the highest since the October-December quarter of 2004. The first quarter’s contraction was revised to 0.71%.

Surging exports – including impressive 56% growth in commodity shipments – a rebound in consumption and investment, and bigger government spending boosted activity.

However, the statistics bureau said the high growth rate was also due to low base effects when compared to the weak pandemic-stricken second quarter last year.

On a quarterly, non-seasonally adjusted basis, the economy grew 3.31%, compared with a revised 0.92% drop in January-March. Analysts had expected 2.94%.

Despite the better-than-expected outcome, analysts are downgrading their outlook for the economy due to the virus’ resurgence and mobility restrictions imposed since July.

Indonesia recorded a grim milestone of more than 100,000 deaths from COVID-19 on Wednesday (Aug 4), with 3.53 million people infected, though health experts believe the true numbers may be far higher.

David Sumual, chief economist of Jakarta-based Bank Central Asia, said anti-virus measures are expected to drag down third-quarter growth by 0.6 point to 3.5%. He has lowered his full-year growth estimate to between 3.6% to 3.7%, compared with a 4.5% projection before the new wave of infections hit.

“We won’t completely return to pre-COVID-19 levels” this year, Sumual said.

Bank Mandiri revised down its 2021 growth outlook to 3.69% from 4.43%, economist Faisal Rachman said.

The central bank had already lowered its projection to a range of 3.5% to 4.3%, from 4.1% to 5.1%, slightly below the government’s 3.7% to 4.5% outlook.

Indonesia’s economy shrank last year for the first time since 1998, by 2.1%, as COVID-19 and measures to contain it hit nearly all aspects of economic activity.

To cushion the blow, the government has spent tens of billions of dollars, while the central bank slashed interest rates and implemented unorthodox measures such as directly financing the fiscal deficit.

In the wake of the new virus wave, Bank Indonesia Governor Perry Warjiyo has pledged to keep policy loose for longer.

The government has also promised to increase welfare programmes and extend tax breaks.

The current stay-at-home order, applied in designated areas across the archipelago, including much of Java and Bali islands, has been extended until at least Aug. 9, and authorities are eyeing a September reopening. Only essential and critical sectors of the economy are allowed to operate at varying capacities now.

A few analysts flagged a risk of a double-dip recession if curbs are extended for longer.

But Faisal of Bank Mandiri said strong demand for the country’s commodities could help cushion the fallout from the new wave. In the second quarter, exports jumped nearly 32% on-year.

Household consumption, which makes up more than half of GDP, rebounded to grow 5.9%, while investment and government spending also accelerated.

Transportation and warehousing as well as food and beverage sectors reported the biggest growth, in line with people’s increasing mobility during the period. – (Reuters)


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