On August 5th Statistics Indonesia (BPS) released data showing that the economy grew by 7.1% year on year on a real, seasonally adjusted basis in the second quarter of 2021. This compares with a 0.6% contraction in the first quarter.

The economic recovery was broad-based in the second quarter of 2021. The growth partly reflects the statistical effect of significant economic disruption in the same period last year. Private consumption, the main driver of Indonesia’s economy, grew by 5.9% year on year in April-June 2021, compared with a 2.6% contraction in full-year 2020. Exports and imports both grew by more than 30% in the second quarter of 2021, signifying strong domestic and external demand in that period.

However, economic activity will contract in sequential terms in the third quarter, because of a surge in Covid‑19 infection since late June. This led in early July to the introduction of a stringent set of social restrictions, which will remain in place until at least August 9th. These measures will stall growth in consumption and investment, and are only likely to be loosened in a phased manner from mid‑August. The Economist Intelligence Unit had originally expected these restrictions to be lifted by end-July. As a result, we will revise down our growth forecast for private consumption and investment in 2021.

Progress on the country’s vaccination programme will be too slow to allow authorities to remove restrictions altogether in economically important provinces until the end of 2021. As a result, the economy will recover only sluggishly in the fourth quarter. Consumer purchasing power and sentiment will remain subdued throughout the year, while investment will be held back by a lack of business opportunities, as well as the constrained financial position of many companies. With economic conditions set to deteriorate in the second half of 2021, credit defaults are likely to pick up. The outlook for 2022 is brighter, as the government will remove social restrictions. We forecast the economy to return to trend growth (real annual expansion of 5‑6%) from that year.

With mobility restrictions being stricter and lengthier than we had previously expected, we will revise down our forecast for real GDP growth in 2021 from 3.9% at present to 3%.

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