The economy of Indonesia grew rapidly in the second quarter of 2022 despite global inflationary pressure and recession risks. Indonesia’s gross domestic product (GDP) grew 5.44% in Q2 2022 over that in the second quarter of 2021, registering the fastest increase in a year. According to Statistics Indonesia, household consumption, which accounts for more than half of the domestic production, accelerated to 5.51% from 4.34% in Q1 2022. By sector, food and beverages, mining, construction and transport, and warehousing recorded faster YoY growth in Q2 2022.
Increase in Exports following Rising Commodity Prices
Indonesia is one of the major exporters of tin, coal, nickel and palm. In 2022, commodity prices were fueled by the Russia-Ukraine conflict, which caused exports to skyrocket and strengthened the country’s economic resilience. Indonesia’s exports increased 19.74% YoY and the largest exporter of palm oil in the world benefited from increase in exports of commodities and a recovery in economic activity among its trade partners. Despite a temporary prohibition on palm oil exports in April 2022, its trade surplus increased 148% to $15.55 billion in the second quarter over that in the corresponding period in 2021.
Increasing Inflation is a Challenge
While Indonesia’s inflation has not increased as drastically as that of its neighbors Thailand and the Philippines, it exceeded the central bank’s target and reached a seven-year high in July 2022. Even the core inflation rate that Bank Indonesia monitors is inching closer to the midpoint of its 2%-4% target. The core inflation has been increasing persistently since October 2021, which could lead the central bank to hike its key benchmark rate. The rate increase will help stabilize the rupiah and reduce impending inflationary pressure without undermining economic growth.
Outlook
While the recent GDP data revealed the insular structure of Indonesia’s economy at a time when recession worries predominate headlines, monetary tightening, rising inflation, and the fear of a global recession pose significant risks in the months ahead. In light of the uncertain global outlook, Bank Indonesia predicted that GDP growth in 2022 could deviate from its target range of 4.5% to 5.3%.
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