Indonesia was affected less severely by the 2009 global recession than many neighbouring economies, largely because exports account for a relatively small proportion of the country's GDP. Moreover, economic growth accelerated in 2010, with real GDP expanding by 6.1% in the year as a whole and by 6.9% year on year in the fourth quarter, its fastest quarterly pace of growth for six years. The economy will grow by 6.1% in 2011, and will then expand at an average annual rate of 6.4% in 2012-15. Private consumption will remain a major driving force behind GDP growth in 2011-15, expanding by an average of 5.6% a year as the unemployment rate falls and that of real wage increases picks up. Fixed investment will meanwhile expand by 8.7% a year on average, supported by strengthening demand conditions. Exports of goods and services grew at double-digit rates in 2010, largely because of healthy Chinese demand for Indonesia's commodities, but growth in overseas sales will slow in 2011, in line with a weaker global economy. Exports will expand at an average annual rate of 10.2% a year in 2011-15. Owing to healthy import demand, the external sector will make only a modest contribution to GDP growth in 2011-15.

Some downside risks to our forecast remain. The most serious concern is that fiscal austerity programmes in Western economies might lead to a rapid slowdown in global economic growth. In addition, the loose monetary policy stance adopted by Western central banks has caused strong flows of capital into Asian countries, creating concerns 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, asset prices are likely to rise. 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 infrastructure.

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