Economy Slows in the Second Quarter, Driven by Rising Production Costs and Weak Demand

Indonesia’s economy showed signs of slowing in the second quarter of this year, driven by rising production costs and weakening domestic demand. This situation reflects pressures faced from both global and domestic fronts.

Global geopolitical sentiments have influenced Indonesia’s economy. Tensions between Iran and Israel recently escalated, leading to a stronger US dollar and negative sentiment toward oil prices. Although these tensions have subsided, there remains the potential for oil prices to rise to $100 per barrel. If this occurs, it would significantly impact Indonesia’s fiscal budget, potentially widening the fiscal deficit by up to IDR 150 trillion to maintain current energy prices.

Bank Indonesia raised interest rates in the second quarter to maintain rupiah stability. This measure has been somewhat successful, although pressures on the rupiah persist, primarily due to domestic perceptions regarding the potential widening of the fiscal deficit in 2025. Additionally, Indonesia’s foreign exchange reserves, which stand at $139 billion, have helped stabilize the exchange rate without the need for further interest rate hikes in June.

Several economic indicators showed a decline in the second quarter. The Purchasing Manager Index (PMI) for the manufacturing sector fell from 52.1 to 50.7, indicating rising production costs due to an unstable exchange rate. Moreover, the Consumer Confidence Index also weakened after initially rising during Ramadan, which impacted the retail index in recent months.

Inflation, which remains below 3%, allows Bank Indonesia the flexibility not to raise interest rates further. However, this decline in inflation is more due to weakening domestic demand. This is an important indicator that economic growth in the second quarter is likely to be lower than in the first quarter.

Given the various pressures, Indonesia’s economic growth in the second quarter is predicted to be around 4.9%, slightly lower than the first quarter’s 5.11%. Despite this, this figure is still quite good amid existing global pressures.

Indonesia’s capital markets show signs of stabilization with some positive data. The Personal Consumption Expenditure (PCE) in the US, which fell from 2.7% to 2.6%, also helped reduce negative sentiment toward the rupiah and bond market. The bond market is showing bullish tendencies, with yields starting to decline, offering potential capital gains in the future.

Overall, although economic growth in the second quarter has slowed, there is still potential resilience that can be maintained through appropriate economic policies. Reduced global sentiment and stabilization in the capital markets are expected to have a positive impact on Indonesia’s economy moving forward.