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ECONOMIC UPDATE - GDP - Weakening Growth in Pre-Election Period

1Q19 GDP growth slows to 5.07%

Statistics Office (BPS) recorded Indonesia’s 1Q19 GDP growth slipped to 5.07% (vs 4Q18: 5.18% YoY) but was stagnant if we compared it to 1Q18 growth at 5.06% YoY. It came below both our estimation and Bloomberg consensus (see table on left).


GDP by expenditure: helped by falling import growth, consumption remain stagnant

Most of components on GDP by expenditure sides came below our estimate. However, better net export due to sluggish import (-7.75% YoY) made overall growth remained robust. Overall consumption growth was robust at 5.25% (the highest since 2015) but it was mainly driven by government (5.21% YoY) and nonprofit organization (16.93% YoY) consumption. Private consumption itself grew at 5.01% YoY, lower than 4Q18 pace at 5.08% YoY. Food and beverages led the private consumption growth with 5.29% growth due to stable food price and significant government social spending growth (106.6% YoY). However, some leisure related consumption experienced slowing down growth like restaurant and hotel and also transportation and communication (see exhibit 4). We believe lower tourist arrival growth played a part on lower leisure growth while higher domestic airline ticket price also gave negative effect. On investment side, the growth significantly weakened to 5.03% YoY (vs 4Q18 at 6.01% YoY). Lower growth in equipment (8.40% YoY) and negative growth in vehicle (7.37% YoY) dragged down the growth. Meanwhile, building investment growth remained robust at 5.4% YoY. We believe 175 bps rate hike in 2018 played a part of pulling down investment growth as we have mentioned in 2019 outlook report.


GDP by sectors: still weak growth in agriculture and manufacture

Industry wise, growth of agriculture and manufacture was still unsatisfying. Agriculture grew only 1.83% YoY, mainly due to harvest season shift to April. This shift caused the food crops output was dragged down -5.94% YoY and skyrocketing food inflation (1.45% MoM) in April. Meanwhile, manufacture growth slowed down to 3.86% YoY, the lowest since 2Q17. Coal, oil and gas processing industry became the main laggard as it posted -4.19% YoY growth in 1Q19. Transportation manufacture also dragged down the manufacture sector as it posted -6.61% YoY growth. Meanwhile, service sector growth inched up to 6.5% YoY (4Q18: 5.8% YoY), the highest since 3Q13. Trade (5.26% YoY) and information and communications sectors (9.03% YoY) lifted out the growth.


Unemployment rate declined to 5.01% but it still left some important homework

Meanwhile, BPS also reported the decline in unemployment rate to 5.01% In February 2019 (Feb-18: 5.13%). Unemployment rate in cities was slightly down to 6.30% (Feb-18: 6.34%) and in villages decreased to 3.45% (Feb-18: 3.45%). Based on education level, vocational school graduates had the highest unemployment rate of 8.63% even though it had decreased from Feb-18 position at 8.92%. Academies, universities and senior high schools graduates also had above average unemployment rate of 6.89%, 6.78% and 6.24%, respectively. It denoted high education does not guarantee absorption in labor market. Some policies must be initiated in high education curriculum to align the graduates’ quality with industry’s demand.


Maintain 5.1% growth forecast, lower growth means higher rate cut probability

We remain confidence on our 5.1% YoY growth forecast in 2019 even though we see downside risk from trade war between US and China. The 2019 growth should be more moderate that 2018 due to high interest rate environment concerning global volatility. However, we see lower global risk going forward that can lead to stable Rupiah. The lower growth in 2019 gives central bank urgency to cut policy rate and accommodate growth. We maintain our call of 50 bps rate cut in 2H19.