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Indonesia's recession eases as gov't boosts spending, exports recover

05/05/2021 | 07:48am EDT
FILE PHOTO: Indonesian national flags fly at a business district, following the coronavirus disease (COVID-19) outbreak, in Jakarta

JAKARTA (Reuters) -Indonesia's economy shrank for the fourth straight quarter in January-March but at a much more modest pace as the government boosted spending and higher commodity prices helped exports, statistics bureau data showed on Wednesday.

The outlook, however, is being clouded by continued COVID-19 infections which are weighing heavily on household consumption, the biggest component of the economy.

Southeast Asia's largest economy contracted 0.74% in January-March from the same period a year earlier, in line with analysts' forecasts and compared with a 2.19% contraction in October-December.

But some analysts say activity will take a long time to return to pre-pandemic levels.

"Indonesia's economy struggled to gain any momentum in the first quarter of the year and a failure to contain the virus will hold back the recovery in the quarters ahead," Gareth Leather, Capital Economics analyst, said in a research note.

Consumption, which makes up about half of the country's gross domestic product (GDP), continued to contract as consumers remained reluctant to shell out on big ticket items such as cars, likely due to uncertainties about jobs, Suhariyanto, head of the statistics bureau, told a streamed news conference.

The bureau's survey showed that unemployment numbers in February had decreased to 8.75 million, from 9.77 million in the previous survey in August, but were still higher than 6.93 million in February 2020.

Average wage levels have also improved, but are still below pre-pandemic levels.

"This is one of the reasons why household consumption is not doing as well as we had hoped," Suhariyanto said.

Meanwhile, government spending grew 2.96% in the quarter as it beefed up social spending. Indonesia's economy suffered its first full-year GDP contraction in over two decades in 2020 as the pandemic and anti-virus restrictions battered businesses and left millions without jobs.

The government pumped 579.78 trillion rupiah ($40.18 billion) into the economy to help mitigate the impact of the crisis last year and expanded recovery spending this year to 699.4 trillion rupiah from 403.9 trillion rupiah budgeted at the start of the year.

Government recovery spending in coming months will be focused more on supporting businesses and creating jobs, Febrio Kacaribu, Finance Ministry head of fiscal office, said in a statement.

Chief economic minister Airlangga Hartarto said on Wednesday he is "confident" that targeted second quarter growth of 6.9% to 7.8% can be achieved, helped by a low base effect when compared with the virus-induced slump in the same period last year.

Further economic improvement will very much hinge on how the government controls the spread of COVID-19, said Moekti Prasetiani Soejachmoen, economist at Danareksa.

"Although a vaccination programme has been rolled out that doesn't mean people will be instantly immune to the virus, so health protocol discipline in the community will very much dictate the economic recovery rate," she said.

Indonesia has recorded the highest number of coronavirus infections and deaths in Southeast Asia. Cases have been declining since peaking in January, but vaccinations are progressing slowly and the country has reported its first cases of a highly infectious COVID-19 variant first detected in India.

The GDP readings are unlikely to push Bank Indonesia (BI) to cut its policy rates further, Wellian Wiranto, an economist with OCBC Bank said in a note.

"It will continue to urge banks to pass on previous rate cuts, rather than undertake new ones," he said.

The central bank has cut key interest rates by a total of 150 basis points, pumped over $50 billion of liquidity into the financial system and eased lending rules since the pandemic started to help cushion the impact of the outbreak.

Bank Indonesia expects the economy to grow by 4.1%-5.1% this year. It trimmed its view last month from a previous forecast of 4.3%-5.3%, saying consumption was not recovering as fast as initially expected.

($1 = 14,430 rupiah)

(Editing by Kim Coghill)

By Fransiska Nangoy and Tabita Diela

© Reuters 2021
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