Indo economics: Strong headline 4Q10 GDP masks soft details - JP Morgan Indo

Indonesia’s fourth quarter real GDP came in as stronger than expected, rising 6.9%oya and up 7.5%q/q, saar (J.P. Morgan 5.5%oya, consensus 6.5%oya).

Private domestic demand soft - In terms of the details, the underlying momentum by expenditure breakdown was strong, driven by a solid out-turn in consumption which rose 8.2%q/q, saar, driven by an outsized gain in government consumption which rose 50.2%q/q, saar. By contrast, private consumption was somewhat soft, growing a modest 2.5%q/q, saar. The softness here likely reflects the combination of wet weather with its impact on farm output and also from the recent surge in food prices in Indonesia which began in 3Q10 and likely took some wind out of real incomes.

Investment outlays grew 8.2%q/q, saar which was likely due to payback for an unusually weak 3Q10. Moreover, the high frequency investment indicators – cement sales in particular – also suggest a modest recovery following the slowdown in 3Q10.

The one area that has been strong is external trade – with both imports and exports surging in 4Q10. Moreover, the December trade surplus printed a record high of US$3.7 bn and suggests a solid start to the 2011 current account position, especially given elevated global commodity prices.

A modest 1H11 growth profile on account of worsening real incomes – Given the lagged impact of rising food prices on private consumption, the risk is that 1H 11 consumption growth might also be affected by the rise in global commodity prices – which will act to reduce discretionary expenditure. Moreover, the upcoming hike in subsidized energy costs for transportation will also likely act to slow private sector demand and CAPEX in 2Q11. These two headwinds could provide for a somewhat soft 1H11 domestic demand profile but net exports could be an offset, with real imports expected to mirror modest domestic demand even as export volumes remain relatively stable.

The current forecast for sequential growth to average between 5.2-5.3%q/q, saar in 1H11 remains in place even as the underlying composition between domestic and external demand shifts.