Southeast Asia's most populous nation is on track to become the world's 7th largest economy by 2030, putting it ahead of the developed nations of Germany and the U.K., a new report by McKinsey Global Institute showed Tuesday.
The report cites the country's young population, new consumer class and the rapid urbanization of cities as reasons that will elevate Indonesia's $850 billion economy up nine spots from its current place of 16th largest economy globally.
The findings do not reveal the projected rankings of other economies, and are based on a "proprietary modeling" method which McKinsey declined to elaborate on.
According to the report, Indonesia's economy will be powered by an estimated 90 million additional consumers with considerable spending power by 2030, making its "consuming class stronger than in any economy of the world apart from China and India."
Its relatively younger population will also keep the economy's productivity edge. McKinsey estimates that 70 percent of the country's population will remain of working age of between 15 and 64 in the next 18 years.
"Indonesia has a much younger, productive, and growing population. That is a different demographic outlook to the situation in many Western European economies, where the labor force will be either static or decline in size in the future," said Raoul Oberman, Chairman of McKinsey & Company, Indonesia.
The country's rapid pace of urbanization-especially in its smaller cities-as it moves up the value chain will contribute significantly to the country's growth. McKinsey estimates that 86 percent of GDP in the country will come from urban areas by 2030.
"The greater areas around Jakarta and Surabaya are the economic powerhouses of Indonesia today, but we expect strong growth in cities like Pekanbaru, Pontianak, Karawang, Makassar, and Balikpapan which are all outside of Java," Oberman said.
The report highlights the key challenges facing the economy, which involves low productivity, rising inequality and soaring consumer demand, and says the country is at a "critical juncture."
"It (Indonesia) needs to build on its recent impressive performance to boost labor productivity to 4.6 percent - that's 60 percent higher than in the past decade," said Oberman. "It also needs to tackle concerns about rising inequality and manage soaring demand from its expanding consumer class to meet the government's longer term GDP growth targets."