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Indonesia’s economy expanded 6.5 percent in the fourth quarter over a year earlier, as surging domestic consumption and investment offset weakening exports growth, giving the central bank room to hold rates steady this week.

The rise in gross domestic product (GDP) was slightly above the median forecast in a Reuters poll of 6.4 percent. It marked the fourth straight quarter of 6.5 percent expansion.

The data also showed the economy shrank 1.3 percent from the previous quarter, a slightly smaller contraction than the 1.5 percent forecast.

Full-year 2011 growth of 6.5 percent, the strongest pace since 1996 when the economy expanded 8.0 percent, IMF data shows.

The Indonesian figures show the G20 economy is being shielded from a global slowdown by domestic demand from the world’s fourth largest population and they cap a year during which Indonesia won a return to investment grade status.

“Indonesia is one of the least exposed economies in the region, with a vast domestic market and a relatively small share of exports to GDP, so is anyway insulated from volatility in the global economy,” said George Worthington, economist for IFR in Sydney. IFR is a unit of Thomson Reuters.

“In that context, the steady pace of growth and core inflation both argue for similarly steady policy settings from the central bank this week.” 

Economists expect full-year growth to slow to 6.1 percent in 2012, below a central bank forecast ranging from 6.3 percent to 6.7 percent.  

Opinions are divided on whether Bank Indonesia will cut rates again in coming months to shore up growth. The central bank has kept its benchmark overnight rate steady for the past two months, after slashing it by 75 basis points in October and November to a record low 6 percent to shield the domestic economy from the chill of the euro area debt crisis. 

It meets to review policy on Thursday, and will weigh the risks to growth from a sluggish global economy against rising inflation expectations.

The quarterly contraction came after exports grew an average 9 percent in the fourth quarter, sharply down from growth of about 40 percent in the third quarter.

Exports such as coal, coffee and palm oil make up a quarter of the economy.

The last quarter-on-quarter contraction was in the last three months of 2010, when GDP shrank 1.4 percent. Despite a slowdown in exports growth, domestic consumption and investment grew at a double-digit pace in the fourth quarter.

Foreign direct investment (FDI) surged 25 percent, while commercial bank loan growth rose 26 percent in the latest figures for November.

Domestic consumption from the world’s fourth-largest population, where an emerging and youthful middle class is snapping up cars and smartphones, makes up over half of the economy.

Retail sales grew an average 27 percent in the fourth quarter, though growth moderated throughout the quarter and retailers now see rising prices because of government plans to lift subsidised fuel costs later this year.

“Looking ahead, we would still be cautious to be too exuberant at this stage,” said Gundy Cahyadi, an economist at OCBC Bank in Singapore. 

“The recent plunge in export growth is a clear indication that the economy is far from immune from the global economic slowdown and we expect this to remain prevalent in 2012.”          

Reuters