Consumer spending drives GDP increase

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia's economy appears to be on track again, growing by 5.52 percent in the third quarter ended Sept. 30 from the same period a year earlier on a revival in consumer spending and strong commodity exports, the Central Statistics Agency (BPS) reported Thursday.

This is higher than the revised 5.08 percent increase in GDP clocked up during the previous quarter, and the fastest in the past five quarters, or since the third quarter of 2005.

The fuel price hikes in October last year, which spurred inflation, caused interest rates to soar and reduced people's purchasing power, had slowed down economic growth in the previous quarters.

On a quarterly basis, Indonesia's economy grew by 3.49 percent in the third quarter. In the first nine months of this year, the size of the economy expanded by 5.14 percent to Rp 2,421 trillion (US$266 billion), or Rp 1,378.4 trillion at 2000 constant prices.

"The economy has, in general, improved," BPS director Rusman Heriawan told a press conference to announce the latest GDP growth figures.

Higher personal consumption, which spurred the faster growth in the third quarter, was partly the result of the easing of inflation and a series of cuts in the central bank's key interest rate. Personal consumption, which contributes 61 percent to GDP, grew by a quarterly 1.66 percent and an annual 2.99 percent.

By October, inflation had fallen to 6.29 percent from 17 percent earlier this year, while Bank Indonesia cut its key rate to 10.25 percent this month from 12.75 percent mid-year. Lower inflation and interest rates have helped improve people's purchasing power.

Indonesia's strong export growth in the third quarter, meanwhile, was partly the result of the 5.36 percent growth in the country's agricultural sector over the three-month period.

Exports grew by 12.05 percent in the third quarter as compared to the same period last year, accounting for 31 percent of GDP.

"Plantation crops alone saw 36.4 percent quarterly growth, particularly palm oil and rubber," Rusman said.

Yet the good news may not be as good as it seems, given that government spending, which helped spur growth in the second quarter, has now slowed significantly. Investment, which is considered a more sustainable driver of growth than consumption, also remains in the doldrums. In addition, there are problems also with exports, as growth in this sector has mostly been in value rather than volume.

Government spending, which accounts for 8.5 percent of GDP, contracted by 5.03 percent in the third quarter, although it was still up 1.72 percent from the same period last year.

Separately, Finance Minister Sri Mulyani Indrawati said she expected growth in the fourth quarter to be "higher than 5.6 percent", but for the year overall "it may be difficult to reach 5.8 percent."

The government had revised down its own growth estimate in the 2006 budget to 5.8 percent from 6.2 percent. Indonesia's $266 billion economy grew by 5.6 percent last year.

------------------------------------ Quarterly GDP growth trends (%, yoy): ------------------------------------


2006 Third Quarter GDP Growth (%):

Q3'06/Q2'06 Q3'06/Q3'05
-------------------------------------------------- Personal consumption 1.66 2.99
Government spending -5.03 1.72
Investments 1.76 -0.25
Exports 5.46 12.05
(Imports) 4.78 9.72
-------------------------------------------------- Total 3.49 5.52
-------------------------------------------------- Source: Central Statistics Agency (BPS)
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