The Indonesian Central Statistics Agency (BPS) will release the country inflation data for June on Monday next week (July 3). As the fasting month (Ramadhan) started in May 27 and Lebaran (Idul Fitri) celebration continues to this week, people are expecting a higher inflation as the household consumption should grow as seen on rising food prices.

The Ramadhan month is actually a month of self-constraint, but demand for various retail products rises steeply in this period. This is why Ramadhan (and subsequent Idul Fitri celebration) always triggers a peak of inflation in Indonesia (the other peak being in the December-January period amid Christmas and New Year celebration).

In the first quarter (Q1) of this year, the economy grew slowly (5.01%), only 0.09% higher compared to 4.92% in Q1 last year. The Indonesian Central Bank (Bank Indonesia/BI) previously explained that a slower growth for the economy in Q1 was due to slower growth of retail and automotive sales, as an effect of on-going consolidation in the corporate sector.

BI said that economic growth could accelerate in Q2, supported by stronger investment and export performance, while consumption remain relatively stable. Meanwhile, rising commodity prices and stronger demand due to the global economic recovery are expected to drive export and investment.

But challenges remain, including the expected subdued consumer purchasing power due to higher electricity tariff, and subdued credit growth as seen in Q1 this year. In addition, government spending was also bleak. Noting that GDP growth in Q1 primarily depended on private investment realization and the improvement in exports (in terms of value due to rising commodity prices, the export performance improvement is not backed by rising volumes).

There are still some factors that will affect the prospect of economic growth in the second half of this year. Business players might have optimism as some economic indicators show the positive trend, but how brave are they in boosting their business activity? This might lead them into a psychology dilemma. Some are still concerned with the persistent low consumption. The government needs to focus on lifting the people’s purchasing power and public consumption model, as the spending from this sector contributed 56.4% of GDP last year.

For this whole year, BI predicted the economy to grow by 5.17%, supported by accelerating exports and investment performance. The household consumption may support however. The growth is expected to improve in the third quarter (Q3) this year supported by private investment in non-building segment, especially construction sector. The lending for construction, part of infrastructure, grew by 27.8%, higher than 26.8% growth by December last year. Nation-wide the outstanding lending for construction reached Rp45.8 trillion.

Export growth remains well, in line with continuous recovery in the global economy as well as a hike in several commodity prices. Investment performance increased on the back of building investment, due to government infrastructure projects, private property sector, and non-building investment gains on activities in commodity and construction-based sectors.

The Investment Coordination Board (BKPM) targets the direct investment to reach Rp795 trillion in 2018, a 17.2% rise compared to targeted Rp678.8 trillion this year. This target in investment is needed for achieving the economic growth target of 5.2-5.6% for next year.

The World Bank also stated that in Indonesia, investment climate reforms and recovering commodity prices have supported a private investment recovery. Export volumes, which had contracted through mid-2016, rebounded strongly in Q4 last year, and export values continued to accelerate in the first two months of 2017 on strong demand from China.

Indonesia, World Bank said, is not planning to extend expenditure cuts into 2017 and has signaled a more accommodative stance for the medium term. World Bank then projected growth in Indonesia to firm from an estimated 5.2% in 2017 to 5.4% in 2019.

By Yohannes Obor

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