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ECONOMIC OUTLOOK - 2H23 - Macroeconomic outlook ahead of general elections



2H23 growth seen accelerating on stronger consumption and investment 

We expect economic growth to accelerate to 5.03% YoY in 2H23, compared to our forecast for 1H23 at 4.97% YoY. Our predictions indicate that household consumption will be the primary contributor to economic growth in 2H23, contributing 54% to the GDP, supported by managed inflation, the enthusiasm in demand and spending around the campaigning period ahead of the election. Besides, we expect household consumption to grow by 5.50% YoY in 2H23, compared to our forecast for 1H23 at 4.90% YoY. Although the outlook for consumption remains strong, tightening credit conditions may linger as a threat due to Bank Indonesia (BI) maintaining the benchmark rate at 5.75%. Meanwhile, the second largest contributor to economic growth will be gross fixed capital formation (GFCF) or investment, accounting for 30% of the GDP, bolstered by downstream commodity policies, the budget for infrastructure, and the omnibus law. We expect investment to grow by 4.80% YoY in 2H23, compared to our forecast for 1H22 at 3.60% YoY. However, it is crucial for the government to maintain political stability, as investors tend to wait and see amidst political escalation.


Current account and budget state back to deficit

We predict that the current account will shift to a deficit in 2H23 due to higher imports compared to exports, primarily influenced by moderating commodity prices. Besides, the government appears to maintain a fiscal deficit in order to finance infrastructure projects and shock absorbers amidst the global economy's slowdown in 2H23. We expect global economic growth to be 2.8% YoY for FY23, decelerating from the previous year's 3.4% YoY.


Watch out for the FED hawkish

The United States (US) is still grappling with the issue of inflation. We believe that the Federal Reserve (FED) will raise its interest rates to a range of 5.50–5.75% in 2H23 in order to address the inflation rate. However, this rate hike would have a negative impact on the US economy, with projected economic growth slowing down to 1.6% YoY in FY23, compared to the previous year's growth rate of 2.1% YoY. The government should be prepared for the potential increase in the Federal Funds Rate (FFR) as it could lead to capital outflows, a weaker Rupiah, and higher interest payments on foreign debt.


Expansionary fiscal and monetary policy to boost China’s economy

We expect China’s expansionary fiscal policy to reach its peak in 2H23, aiming to stimulate domestic demand. As a result, the projected consolidated budget deficit might widen to 6.5% of GDP in 2023. Additional monetary policy easing is also necessary to revive businesses. We expect China's loan prime rate to be cut to 3.45% in 2H23.  On the other hand, we anticipate escalating geopolitical tensions between China and Taiwan, and a global economic slowdown that will weigh on China's economic growth in 2H23. Overall, we forecast China's economic growth to rebound from 3.0% YoY in FY22 to 5.6% YoY in FY23. The positive outlook for China's economy is significant for Indonesia's economic growth as well, given that China serves as the largest trade partner for both imports and exports.