The acceleration in Indonesia’s GDP growth in Q4 sits uneasily with other activity indicators, which suggest the economy lost momentum towards the end of last year, a note from Capital Economics says. With the government intent on lifting growth to 8% and signs that the national accounts may have been subject to systematic smoothing, concerns over data reliability are likely to intensify.

As such, Capital Economics has flagged reservations about Indonesia’s GDP figures for some time. Since 2014, growth - aside from a handful of quarters during the pandemic - has typically remained within a narrow 4.8% to 5.2% range. Such stability is unusual by international standards and appears inconsistent with the scale of external and domestic shocks faced by the economy over that period, including pronounced swings in commodity prices.

A particular concern lies in the treatment of the “taxes less subsidies” component of GDP. Headline GDP is compiled by estimating gross value added (GVA) across sectors and then converting it from producer prices to market prices by adding taxes and subtracting subsidies. In principle, this is a routine statistical adjustment.

In practice, however, the taxes less subsidies component has exhibited an almost perfect inverse relationship with GVA growth. It has consistently added or subtracted just enough to keep overall GDP growth close to 5%. This pattern is atypical. In most economies, stronger GVA growth is accompanied by a rise in taxes less subsidies. While coincidence cannot be ruled out, the consistency of the inverse relationship raises the possibility that headline GDP has been smoothed.

That said, there is no clear evidence that growth has been systematically overstated or understated. Since 2014, excluding the pandemic-driven contraction and rebound, GDP growth has averaged 5.1% year on year. GVA, which appears either unsmoothed or less smoothed, has risen by 4.9% year on year. Meanwhile, the Capital Economics Indonesia Activity Tracker, constructed from monthly indicators, has also averaged roughly 5% over the same period.

The recent acceleration in GDP growth to 5.4% year on year in Q4 - taking it decisively above the long-standing 5% band - therefore presents a dilemma. A benign interpretation is that growth genuinely strengthened and the statistics office has eased any prior smoothing practices. Some developments lend support to that view, notably an increase in fiscal support during the second half of last year.

Even so, the broader data flow offers less encouragement. The Capital Economics ‘Tracker’ pointed to softer growth in Q4, and GVA growth edged down from 5.4% year on year to 5.3% year on year. The pick-up in headline GDP was driven by a large positive contribution from taxes less subsidies, as the latest data show. Given the government’s ambition to push growth to 8%, the risk of political pressure on official figures cannot be dismissed.

Data uncertainty also complicates the task of Bank Indonesia. Estimating the output gap, forecasting inflation and calibrating the appropriate monetary stance all become more difficult when headline growth figures are open to question. On current evidence - including subdued inflation and low manufacturing capacity utilisation - the economy appears to be operating with a sizeable output gap. Misjudging that gap increases the risk of policy error, with inflation persistently overshooting or undershooting target.

The Q4 data may yet prove to mark a genuine improvement in momentum. But until corroborated by a broader set of indicators, scepticism over the strength of the acceleration - and over the integrity of the headline figures - is likely to linger.