- The root of Indonesia’s current economic paradoxes lies in a structural change in its manufacturing industry. Capital-intensive, commodity-related industries—driven by “downstreaming” program—have thrived, while labor-intensive, final goods industries have come under pressure.
- Downstreaming has successfully bolstered exports but also increases Indonesia’s vulnerability to fluctuations in commodity prices and Chinese demand. This puts it under considerable risk in 2025 amid a stronger USD, deflation in China, and re-escalation of the trade war.
- Layoffs in the formal manufacturing sector have cut into the purchasing power of the lower/middle-class and the earning of SMEs. Other segments of the economy—large corporations, the plantation sector, white-collar and wealthier households—are relatively insulated, but tend to adopt a more cautious posture.
- Government spending has greatly influenced the business cycle recently, and BCA Big Data have pointed towards more moderate growth since after the General Elections in Feb-24. Most indications point towards subdued nominal growth and money velocity in 2025, unless the new government can quickly realize their spending goals.
- Expansive fiscal policy, CAPEX needs from capital-intensive industries, and tight global liquidity have caused a scramble for liquidity at the expense of the rest of the private sector (including households). This has been exacerbated by high real rates as BI mounts a strong defense of the Rupiah. Ultimately, a more pragmatic monetary approach might become necessary to sustain robust private spending amid continued global pressure.
