The Indonesian economy: stay steady amidst increased global uncertainty

Jakarta, 10 July 2023 - Today, PwC Indonesia released the PwC Indonesia Economic Update - Q2 2023, its publication that analyses the trends and challenges of Indonesian economic conditions. In addition, the report also defines recent global economic dynamics and their impacts on Indonesia. 

Julian Smith, PwC Indonesia Investment Director, stated, “The world economy entered 2023 with optimism, fueled by the reopening of China and better-than-expected European economic performance in coping with the Russia-Ukraine conflict. However, during the first semester of 2023, there were several notable economic events that downgraded global economic optimism. First, the series of banking collapses in the US and Europe, which highlighted the global financial system’s deterioration. Second, the Eurozone officially entered a recession, as marked by GDP contraction in Q4 2022 and Q1 2023. Third, the new normal of a high interest rate is expected to stay as the fight against inflation continues.” 

Nevertheless, Julian noted that, “Indonesia's economic growth remains strong amidst a global economic slowdown, which was driven by improving domestic demand and continued positive export performance. By industry, the growth was mainly led by Transportation and Storage, due to increased community mobility and foreign tourist arrivals.”

Furthermore, he added that, “Indonesia's total investment realisation in Q1 2023 amounted to IDR 328.9 trillion, equivalent to 23.5% of the total investment target for 2023. The realised value was primarily contributed to by investments outside of Java, as Central Sulawesi is seen to be the top FDI location for its mineral resources reserves. However, global economic weakening might hinder Indonesia’s progress in achieving this year’s target.”

In addition to that, “In 2023, the infrastructure budget is focused on accelerating infrastructure development that supports economic transformation and new growth centres, such as accelerating the completion of national strategic projects (PSN) and promoting the Public Private Partnership (PPP) financing schemes.”

Denny Irawan, PwC Indonesia Head of Research and Economics, added, “Domestically, Indonesia’s remarkable economic recovery continues, recording 5.03% YoY GDP growth in Q1 2023. Inflation has moderately decreased since January 2023, touching 4% YoY in May 2023. Export remains strong and was the largest growth contributor in Q1 2023, recording 11.68% YoY growth, as fueled by China’s domestic recovery. Investment realisation (foreign and domestic) recorded satisfying growth of 16.5% YoY in Q1 2023.  Sector-wise, the Transportation and Storage sector was recorded as the fastest growing in Q1 2023 (15.93% YoY). Meanwhile, the second fastest was the Accommodation and Food & Beverages sector (11.55% YoY). This development highlighted the continuation of recovery of domestic mobility and tourism.”

Denny also stated, “Nevertheless, considering the persistence of global uncertainties, Indonesia’s steady economic progress still faces major challenges. We still see international economic factors (trade and investment) as potential sources of weakening of Indonesia’s economy. Our growth projection for Indonesia in 2023 stays at 4.8%. This number is in the range of Bank Indonesia’s projection of 4.5% - 5.3%, and lower than the Ministry of Finance’s latest projection range of 5.1% - 5.7%. This number is also slightly lower than the consensus of 4.9%.”

Denny also noted that, “Inflation in Q1 2023 was steadily decreasing and recorded at 4.97% (YoY) in March 2023, still above the Bank Indonesia target range of 3.0 ± 1%​. Although it remains high compared to the pre-pandemic level, Indonesia's economic prospects remain promising, as reflected in strong domestic demand.”

Furthermore, “Tighter monetary policy settings motivated by elevated inflation and slowing global growth are expected to slow Indonesia’s economic activity through the second semester of 2023. At the sectoral level, the Indonesian renewable energy and tourism market value are expected to continue to increase, due to Indonesia’s commitment to net-zero emissions and rising inbound total tourist arrivals in Indonesia, respectively.”