Indonesia's economy shrank for the first time since the Asian financial crisis more than two decades ago as movement restrictions to contain the coronavirus outbreak took a toll on Southeast Asia's largest economy.
Gross domestic product contracted 5.32 per cent in the second quarter from a year ago, data from the statistics bureau showed Wednesday.
That was worse than the median estimate of a 4.72 per cent contraction in a Bloomberg survey of economists.
"You know a blow is coming and you've been bracing yourself for it, but when it comes it's still going to hurt -- a lot. That perhaps sums up the reaction to Indonesia's 2Q GDP data," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. "While we still see a recovery in the second half, the path is made all the more uncertain by global developments."
Compared to the previous quarter, GDP contracted 4.19 per cent, worse than the 3.65 per cent drop expected by economists.
Indonesia's benchmark stock index erased gains to retreat as much as 0.3 per cent after the data release, while the rupiah held gains of 0.3 per cent against the US dollar.
President Joko Widodo has said the economy is showing signs of recovery from the second-quarter slump, with household consumption, purchasing power and money circulation in rural areas rebounding.
However, the country's virus outbreak, the worst in Southeast Asia, shows no signs of abating and could weigh on that outlook.
Retail sales in the consumption-reliant economy have taken a knock amid the pandemic, while manufacturing continues to contract, as the latest purchasing managers index shows. Indonesia's exports, dominated by commodities such as coal and palm oil, have shown some improvement in recent months.
The government has lowered its growth forecasts several times already and now sees GDP in a range of -0.4 per cent to 1.0 per cent for the year.
The central bank has cut its own estimate to 0.9-1.9 per cent.
The government is trying to ramp up its stimulus spending after disbursing only 141 trillion rupiah (US$9.7 billion), or 20 per cent of the 695.2 trillion rupiah it has allocated for fiscal support.
Bank Indonesia has cut interest rates by 100 basis points this year and agreed to finance the widening budget deficit by buying billions of dollars of sovereign bonds directly from the government.
The central bank "may come under renewed pressure to ease its policy rate, but we do not think it will cave in just yet at this point, given the need to anchor rates differential to preserve fund inflows still," OCBC's Wiranto said.
"While the authorities might be tempted to loosen social restrictions even more now to help juice up the economy, there is nonetheless the risk of contributing to the virus resurgence."