Indonesia is forecast to be one of the largest economies in the world within the next 20 years, with the government's proactive approach to business starting to pay dividends. However, a recent report by the Asian Development Bank suggests modest growth in the short-term but solid economic foundations as we advance.
Economic performance
In 2022, Indonesia saw GDP grow by 5.3%, which was undoubtedly impressive in light of the ongoing pandemic challenges. While growth in 2023 is expected to be a little more modest at 4.8%, rising to 5% in 2024, these are still impressive figures when put into context. The Far East has experienced the most prolonged impact from Covid, although thankfully, the majority of restrictions have now been lifted.
Export boom
Looking back at 2022, the Indonesian economy benefited from an export boom that made up for modest domestic demand at the time. In what is effectively a swings-and-roundabouts scenario, global headwinds are likely to cut export growth in 2023 and 2024. However, growing domestic consumption will offset this to a certain extent. Thankfully, there are signs that consumer spending is "returning to normal", and businesses are becoming more confident about the future.
Inflation in Indonesia
While the UK continues to grapple with near double-digit inflation, Indonesia's situation has been less dramatic. In September 2022, inflation peaked at 6% and while well above the central bank's 4% target rate; this is relatively modest compared to global struggles. Due to monetary policy tightening and easing commodity prices, inflation is expected to fall to 3.5% by the end of 2023. This equates to an average inflation rate of 4.2% in 2023, just above the central bank target rate.
Employment market
While the Far East now as a whole has a much younger population and a more flexible workforce, there may be some short to medium-term challenges in Indonesia. As we touched on above, the Far East experienced a prolonged impact from the pandemic, with Indonesia suffering:-
· Earnings losses by workers
· Learning losses by children
There is a general feeling that these two issues could reduce the potential for short-term economic growth, limiting expansion in the skilled workforce. Interestingly, while labour market indicators have returned to 2020 levels, they are still some way off their pre-pandemic figures.
Government assistance
One thing which has become evident in recent years is the long-term vision of the Indonesian government concerning the economy and the workforce. This is perfectly demonstrated by the government pre-employment card program, which provides an array of assistance for individuals, including:-
· Technical and vocational skills through digital learning
· Training to start businesses
· Scholarships
This proactive approach to the Indonesian workforce should help reduce the pandemic's impact, which is still being felt in some areas.
Summary
The fact that some critical labour market indicators, such as unemployment and real wages, have yet to return to pre-pandemic levels is a concern. That said, recent actions by the Indonesian government should assist those struggling to find employment or start a new business. In the short-term, economic growth may be stunted somewhat due to the pandemic overhang, but in the long term, there are still solid foundations for long-term growth.