Indonesia's economy: Domestic demand boosts expansion

"The key thing will be whether confidence domestically also takes a hit," Prakriti Sofat, Barclays

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Indonesia's economy expanded more than expected in the second quarter as domestic consumption helped offset a decline in demand for exports.

Between April and June, the economy grew by 6.4% from a year earlier. Analysts had expected growth of 6.1%.

Economists said low interest rates, stable consumer price growth and strong consumer and business confidence had helped boost domestic demand.

Indonesia is South East Asia's largest economy.

"As per today's data, Indonesia remains one of the fastest growing, and perhaps more importantly, one of the most stable economies in Asia," said Taimur Baig, an economist with Deutsche Bank.

Domestic consumption accounts for almost 60% of Indonesia's overall economy.

'Key vulnerability'

Start Quote

The key vulnerability for Indonesia comes from its exposure to China”

End Quote Prakriti Sofat Barclays

Despite the robust numbers and its relatively low reliance on exports, analysts warned that Indonesia's growth may be still be affected by a slowdown in the global economy, especially in China.

Commodities and natural resources make up the bulk of Indonesia's exports and China is a key market for shipments of those products.

However, growth in China has been slowing. The Chinese economy grew by 7.6% in the second quarter, its slowest pace of growth in three years.

As a result, demand for commodities is expected to slow, resulting in a fall in prices, which may hurt Indonesia's growth.

"The key vulnerability for Indonesia comes from its exposure to China," Prakriti Sofat, an economist with Barclays, told the BBC.

Ms Sofat warned that if China's economy continued to slow, the effect on commodity prices and on Indonesia's growth may be much bigger.

"That terms of trade effect also feeds into household spending as well as business confidence and hence the investment in the economy," she added.

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