Domestic demand, one of the biggest contributors to Indonesia’s economy, also rose at a healthy pace, showing Southeast Asia’s largest and fastest-growing economy was firing on all cylinders.
The strength of the economy and easing inflation place Indonesia in an enviable position in a region increasingly worried about stalling growth in its biggest consumer base, the US, and the growing risks of contagion from Europe’s debt crisis.
The economy could grow at 7 percent next year, supported by growing industrial output, the statistics bureau said following the data release on Friday. The estimate is largely in line with the central bank’s 6.4-6.9 percent projection for 2012.
“The strong growth outcome validates expectations that the economy could outperform its regional peers this year, with strong support from domestic consumption and firm external sector,” said Radhika Rao, economist with Forecast PTE in Singapore.
“This will also alleviate any nagging worries on Bank Indonesia’s mind,” she said, adding that the economy “will enjoy a ‘sweet spot’ of stable inflation and a sustained growth outlook.”
The annual pace of growth in Southeast Asia’s largest economy matched the previous quarter’s rise, although it stayed well below 6.9 percent in the last quarter of 2010, which was the fastest rise in at least six years.
The economy grew 2.9 percent in the second quarter from the preceding three months, as expected, showing no signs of the loss of momentum seen in many other countries in the period.
Exports grew at a 17.4 percent annual pace last quarter while investment expanded more than 9 percent. Private consumption grew 4.6 percent.
The attractive combination of strong growth, tame inflation and a healthy fiscal situation have lured foreign investors to Indonesia, and driven stocks to record highs and bond yields to record lows.
On Friday, however, Indonesian stocks, Southeast Asia’s best performing equity market, fell more than 5 percent as fears that the US economy is stalling and a spike in euro zone debt yields caused global markets to panic.
Indonesia’s central bank has raised rates only once this year, in February, to calm market worries over inflation. But with inflation now well within Bank Indonesia’s target, most economists expect rates to be on hold for the rest of the year.
Even at this heady pace of growth, inflation is under check, partly owing to a surging rupiah and to subsidized fuel prices.
The rupiah has gained more than 5 percent against the US dollar so far this year, and a central bank official later said it expected the currency to strengthen further.
The central bank sees recent capital outflows as temporary and it does not expect a global recession, said Perry Warjiyo, Bank Indonesia’s director for monetary research and policy.
In July, inflation slowed to a 14-month low of 4.6 percent, and the central bank is widely expected to leave its benchmark overnight rate on hold at 6.75 percent, where it has been since early February, at a meeting on Aug. 9.
Regional economies on a similar fast trajectory such as China and India have other worries to tackle. Both those economies are facing stiff inflationary pressures which has kept them on a policy tightening path so far, juggling overheating in some sectors of the domestic economy and the risks of weakening external demand.
Indonesia’s commodity-fueled consumption and investment boom gives it an advantage.
“Indonesia is in a far more resilient position to weather this protracted global soft patch. Having a larger domestic demand and a more commodity export base will dampen the negative external demand shock,” said Chua Hak Bin of Bank of America-Merrill Lynch in Singapore.
Total investment grew by 22 percent in the second quarter from a year earlier, with foreign direct investment rising 21 percent and on track for a record high, the country’s investment board said last month.
Export growth hit an annual 36 percent pace in the first half due to strong sales of commodities such as palm oil and rubber, and Indonesia’s statistics bureau expects total exports may reach a record $200 billion this year.
Economists have not seen any signs of an economic bubble, but the central bank said it might issue a policy to slow loan growth in certain sectors if it rises too fast.