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The Indonesian economy has improved.
“In 2019, 57.3 million people were classified as middle class, but by March 2024 this shrunk to 47.8 million people.”
This is underscored by the release of second quarter Gross Domestic Product figures showing stronger-than-expected growth.
ANZ Research has raised its Indonesia full-year 2025 growth forecast to 4.9 per cent (from 4.7 per cent) on the back of the figures.
But what is driving this growth and is it sustainable?
Indonesia is enjoying a period of growth after the COVID pandemic years when restrictions on movements hit business activity and triggered the first recession in Indonesia in more than 20 years.
Despite this recovery, data from Statistics Indonesia (BP) reveals that the middle class – a key driver of domestic consumption – shrunk during the pandemic period. In 2019, 57.3 million people were classified as middle class, but by March 2024 this shrunk to 47.8 million people.
Signs of resilience
Indonesia’s growth picked up more than expected in the second quarter, to 5.12 per cent year on year.
The expenditure breakdown highlighted a strong rebound in investment growth, which more than reversed the first quarter slowdown. The rebound in investment is encouraging, suggesting renewed infrastructure momentum and a rebuilding of confidence following elevated policy uncertainty earlier this year amid the leadership transition.
Private consumption growth remained broadly steady, continuing to anchor domestic demand.
Export growth accelerated, supported by both non-oil and gas goods and foreign tourist arrivals, but this was offset by a sharp rise in imports, leading to a moderation in net export growth.
Government spending remained a drag on overall growth, but the pace of decline has slowed suggesting a bottoming out in fiscal contraction.
Continue the pace?
As we look ahead, ANZ Research believes growth is unlikely to accelerate meaningfully from the second quarter’s pace in the coming quarters given the external headwinds and the domestic labour market fragilities.
Net exports are expected to come under pressure, particularly from the recent hike in US tariffs and softer global demand.
While Indonesia is less trade-dependent than some of its regional peers, it remains vulnerable to indirect effects, such as increased competition from cheaper imports and subdued demand for key commodity exports.
Lingering Pandemic fragilities
Private consumption growth is likely to remain steady but constrained, as labour market fragilities persist.
The rising share of informal employment, ongoing layoffs and a shrinking middle class reflect lingering scarring effects from the pandemic that continue to weigh on household income and purchasing power.
High-frequency indicators such as consumer confidence and loan demand remain subdued, pointing to cautious spending behaviour amid an uncertain job market.
Nonetheless, ANZ Research believes robust public sector activity can help cushion the slowdown.
Budget disbursement, which had been slow in the first half of this year due to delays in program rollouts and reallocation processes, has picked up since June.
As just 40 per cent of the budget was disbursed in the first half of 2025, there is significant scope for catch-up in the second half of the year.
Public-led investment, such as sovereign wealth fund Danantara’s USD5bn (0.3 per cent of GDP) investment target for 2025, progress on Jakarta’s sea-wall project and the ongoing 3 million housing program, should also help support domestic demand.
Krystal Tan is an Asia Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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