A deeper look into 2019 economic growth rate “oddities”

Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

IO – Indonesia’s economic growth for the past 5 years remains stable in a range of 5%. 2015-2019 rates are, respectively, 4.88%, 5.03%, 5.07%, 5.17, and 5.02%. Such a solid and stable economic growth rate arouses doubts in many observers, especially foreign ones. Gareth Leather of London Capital Economics bluntly declared “We don’t have much faith in Indonesia’s official GDP figures, which have been suspiciously stable over the past few years.”

Disbelief bout Indonesia’s economic growth data is reasonable, because our economic activities over the past 5 years have fluctuated wildly. Exports and imports were both volatile. Our investment rates crashed. Under such a combination of circumstances, how on Earth did we apparently 

such a stable economic growth rate? For example, how did the contribution to economic growth from household consumption in 2018 and 2019 register nearly the same, at 2.74% and 2.73%, respectively? This is odd, as many citizens fear their buying power has sunk as the cost of various necessities soars.

“Economic growth” is rather an abstract term for non-economists. Therefore, we need to provide a simple explanation that laymen can easily understand.

First, everyone needs to know that there are two kinds of value: nominal value, or the apparent value of money, which changes every day; and the real economy, which is the economic condition in actuality. This value is relatively constant.

Let’s say for example the nominal economic value in a previous period is IDR 10,000 trillion, while the current nominal value is IDR 11,000 trillion. We can say that the nominal or figure has risen 10%. However, this does not signify that economic growth automatically becomes 10% as well, because this IDR 11,000 trillion might well include rising prices. If prices currently also rise an average of 10%, the real economic value of the current period is in fact only IDR 10,000 trillion.

How did we get to that figure? The nominal economic value of the current period is divided by the index of rising prices: IDR 11,000 trillion (1 + 10%) = IDR 11,000 trillion 1.1 = IDR 10,000 trillion. In other words, economic activity in the current period is pretty much the same as in the previous period at IDR 10,000.00 trillion. Therefore, current economic growth is actually 0%.

But what if data on price increases, or inflation, is manipulated to 

come out false? For example, inflation should be 10%, but is reported at 4%? In such a case, the current period real economy is actually IDR 10,577 trillion (= IDR 11,000 trillion 1.04), or rising IDR 577 trillion. Therefore, economic growth is actually 5.77% (IDR 577 trillion IDR 10,000 trillion x 100%). In other words, different inflation data can drastically alter an economic growth rate, jumping from 0% to 5.77%.

To follow the logic of the above explanation, let’s study the inflation (or deflator) data used to calculate the 2019 economic growth rate in more detail. Deflator or an inflation rate is used to correct the value from “nominal value” to “real value”.

Demand-type economic activities are basically Household Consumption, Government Spending, Investment (Gross Fixed Capital Formation = GFCF), and Exports-Imports. The deflator for each category can differ. The question is, “Do the differences make sense?”

My calculation of Statistics Indonesia (Badan Pusat Statistik – “BPS”) data shows that Household Consumption inflation in 2019 was 3.16%. This means that growth contributed by Household Consumption was 2.73% (derived from the 5.02% economic growth rate in 2019). When we see the quarterly (Q) data, growth in 2019 for each quarter comes out to 2.8% (Q1), 3.11% (Q2), 3.32% (Q3), and 3.38% (Q4). In other words, it continues to rise every Quarter. On the other hand, Government Spending (Expenditure) in 2019 was only 0.43%. This is ironic: how come Government Spending is much lower than Household Consumption? Quarterly data also shows that Government Spending growth rate went opposite to that of Household Consumption. This rate continues to decline, from Q1 to Q4 of 2019 at 3.36%, 1.96%, 0.88%, and -2.31%, respectively.

This data naturally raises quite a few eyebrows: “How come the Government Expenditure index continued to decrease, even reaching a deflation level of -2.31% in Q4?” With such a low inflation rate, Government Spending growth remained stuck at 0.26% (in the previous year, 0.38%), while Government Earnings (taxes) remained stagnant.

Inflation data for investments in 2019 is also doubtful at 2.88% (Q1), 2.79% (Q2), 2.40% (Q3), and a steep drop to 1.40% in Q4 of 2019. How come it keeps falling, and sharply to boot?

Finally, inflation for exports and imports. 2019 economic growth, without including exports and imports, was only 3.59%. We all know that the nominal value of exports and imports has dived: exports have dropped 6.34%, while imports are down 8.47%. However, after correction for inflation, economic growth from exports was -0.19%, while import contribution crashed to -1.62%.

This is because the deflator data used is different: export deflator (inflation) was -5.51% (signifying deflation), while import deflator was only -0.85%. Therefore, export growth minus import growth sets us at a positive rate of 1.43%, which resulted in our overall economic growth to be 5.02% (3.59% + 1.43%). Therefore, even though exports and imports settled, both still managed to contribute strongly to economic growth, at 1.43%. amazing.

We hope that BPS can explain the above results of inflation/deflation calculations, because we are utterly confused by them.