The central bank (Bank Indonesia/BI) said global economic uncertainty is increasing again. A rebalancing in the composition of global economic growth in 2023 is gaining traction, with growth still forecast at 2.7%. On one hand, lower economic growth in China is a corollary of weaker economic confidence and high household debt, thus eroding consumption and property sector performance, with an impact on investment.
Economic moderation in Europe has been triggered by escalating geopolitical tensions between Russia and Ukraine. On the other hand, improving consumption on the back of higher wages and excess saving has boosted economic growth in the US beyond the previous projection.
Meanwhile, inflationary pressures in advanced economies are persistently high in response to solid economic performance and tight labour markets, accompanied by milder inflationary pressures in developing economies. Such conditions are expected to perpetuate monetary policy rate hikes in advanced economies, including the Federal Funds Rate (FFR).
Consequently, global financial market uncertainty is on the rise again, with capital flows to developing economies becoming more selective. Currency pressures in developing economies are intensifying, necessitating a strong policy response to mitigate global contagion risk, including in Indonesia.
At home, economic growth in Indonesia remains solid, supported by domestic demand. Economic growth in the second quarter (Q2) of 2023 was recorded at 5.17% year on year (y/y), up from 5.04% y/y in the previous period. The main sources of growth are strong domestic demand in line with faster household and government consumption growth, coupled with increasing investment, despite declining export performance due to global economic headwinds and softer international commodity prices. National economic growth in 2023, therefore, is still projected in the 4.5-5.3% range.