Indonesia was affected less severely by the 2008-09 global recession than many neighbouring economies, largely because exports account for a relatively small proportion of the country's GDP. Moreover, real GDP growth has accelerated in 2010, to average 5.9% year on year in the first three quarters of the year. We estimate growth in 2010 as a whole at 5.9%. The economy will then grow by 6% in 2011 and 6.4% in 2012, before expanding at an average annual rate of 6.3% in 2013-15. Private consumption will remain a major driving force behind GDP growth in 2011-15, expanding by an average of 5.5% a year as employment growth accelerates and real wage increases pick up. Fixed investment will expand by 8.8% a year on average in the forecast period, supported in the early years of the period by the revival of investment plans that were postponed in early 2009 and later by strengthening demand conditions. Exports expanded strongly in 2010, thanks largely to healthy demand from China for Indonesia's commodity exports, but growth in overseas sales will slow in 2011 in line with a weaker global economy. Exports will then expand by around 8% a year in 2012-15. Owing to a recovery in import demand, the external sector will make only a modest contribution to GDP growth in 2011-15.

Downside risks to our forecast still exist but have diminished in the past year or so. The most serious concern is that fiscal austerity programmes in Western economies might lead to an unexpectedly rapid slowdown in global growth. The public finances in many countries have deteriorated dramatically, and an increasing number of governments will therefore look to tighten fiscal policy in order to guard against the possibility of sovereign payment crises. The loose monetary policy stance of Western central banks-and particularly the Federal Reserve in the US, which in early November announced a second round of quantitative easing-has led to heavy flows of capital into Asian countries, creating fears that asset price bubbles could develop in these economies. Such bubbles create risks, particularly if assets are used to back higher levels of borrowing; in such circumstances, the bursting of bubbles can trigger a process of deleveraging that hurts a country's real economy. Indonesia was a recipient of strong flows of foreign finance in 2010, and it will continue to attract substantial inflows in 2011. As a result, it is likely that asset prices will rise and that credit growth will accelerate. However, Indonesian companies and households are not highly leveraged, and a period of strong lending growth could benefit the economy, particularly if funds are invested in productive areas, such as improvements to the country's dilapidated infrastructure.

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