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Today's Headlines Household Consumption
In this article we take a look at the strength of the Indonesian economy by assessing a variety of macroeconomic indicators such as retail sales, consumer confidence, and credit growth.
In December 2022 the Asian Development Bank (ADB) cut its forecast for economic growth of Indonesia in full 2023 from 5.0 percent year-on-year (y/y) to 4.8 percent (y/y). In its Asian Development Outlook Supplement (the December 2022 edition), the institution noted that weak economic growth in developed countries will impact negatively on Indonesia’s export performance.
Despite the challenging international conditions (aggressive monetary tightening in the United States, the Russo-Ukrainian war, stagflation, a looming recession across the West, and weak growth in China) and a significant rise in the prices of subsidized fuels on 3 September 2022, Indonesia posted another solid economic growth rate.
In our July 2022 report we asked ourselves the question: ‘should we become more optimistic about Indonesia’s economic growth?’ since our outlook for the Indonesian economy in Q2-2022 fell out of tune with the general consensus held by a selection of international and domestic institutions. While our pessimistic stance served us well in 2020 and 2021 (when our projections also fell out of tune with the general consensus), this time it is our side that needs to revise its stance
At the start of June 2022, the World Bank decided to cut its forecast for Indonesia’s economic growth in full-year 2022 from the level of 5.2 percent year-on-year (y/y) to 5.1 percent (y/y). Do we need to be concerned?
The Statistical Agency of Indonesia (Badan Pusat Statistik, BPS) released Indonesia’s Q1-2022 gross domestic product (GDP) data on 9 May 2022. Based on its calculation the Indonesian economy expanded 5.01 percent year-on-year (y/y), which is in fact better –albeit very modestly– than our projection that was set at 5.0 percent (y/y).
On Friday 5 November 2021 Indonesia’s Statistical Agency (BPS) released the official Q3-2021 gross domestic product (GDP) data for Indonesia. While we had predicted a mediocre performance (based on the country’s lackluster retail sales, consumer confidence, credit growth and low inflation in this year’s third quarter), the figure was still below our forecast.
On 5 August 2021 Indonesia’s Statistical Agency (Badan Pusat Statistik, henceforth BPS) released the official gross domestic product (GDP) data for the second quarter of 2021.
Lockdowns and restrictions imposed by governments around the globe in an effort to curb the further spread of COVID-19 in society as well as people’s fear to contract COVID-19 resulted in an unprecedented decline in consumption, production, trade, tourism and investment, particularly in the second quarter of 2020.
It was already known that –just like in 2020– the Indonesian government would ban the traditional mudik this year (mudik, which is a distinctive feature of Indonesian culture, refers to the exodus of millions of city-dwellers toward their places of origin where they typically spend a few days to celebrate the end of the Ramadan month).
Latest Columns Household Consumption
There are signs that household consumption in Indonesia is rebounding ahead of this year's Idul Fitri holiday. This would be a great boost for Indonesia's overall economic growth as private consumption accounts for around 57 percent of the nation's total economic growth. One of the reasons why Indonesia's gross domestic product (GDP) growth has been stuck around the 5 percent (y/y) mark in recent years is subdued household consumption (which has fallen slightly below the 5 percent y/y mark).
In full-year 2017 the Indonesian economy expanded 5.07 percent year-on-year (y/y). Indonesia's Statistics Agency (BPS) announced on Monday morning (05/02) that the nation's gross domestic product (GDP) growth reached 5.19 percent (y/y) in the fourth quarter of 2017. These figures show a mixed picture.
Household consumption in Indonesia is expected to improve in 2018. This assumption is based on a number of indicators that show a positive trend. For example, consumer confidence in Indonesia rose to 126.4 points in December 2017. The country's macroeconomic picture is also strengthening with accelerating economic growth, low inflation and a stable (or actually appreciating) rupiah rate.
Within Indonesia it is still being debated whether consumers' purchasing power has really weakened in the third quarter. Some argue consumers are currently focused on saving their money rather than spending it (this explains rising third-party funds in Indonesia's banking system). Others argue that Indonesia's household consumption data are distorted because this year's Ramadan and Idul Fitri celebrations fell in the second quarter of the year (whereas in 2016 these celebrations fell in Q3).
The central bank of Indonesia (Bank Indonesia) revised down its projection for Indonesia's economic growth in 2016 to the range of 5.0 - 5.4 percent (y/y), slightly below its previous forecast in the range of 5.2 - 5.6 percent (y/y). Bank Indonesia Governor Agus Martowardojo said the central bank decided to trim its projection for gross domestic product (GDP) growth this year due to sluggish global economic growth, low commodity prices, and Indonesia's slightly disappointing Q1-2016 GDP growth figure at 4.92 percent (y/y).
Cosmetics and household goods producer Kino Indonesia, which conducted an initial public offering (IPO) on the Indonesia Stock Exchange in late-2015, is expected to post good net profit growth in 2016. Last year the company's net profit surged a whopping 153 percent (y/y) to IDR 263 billion (approx. USD $20 million) due to higher selling prices and lower production costs. In 2016 Kino Indonesia's net profit is expected to grow 44 percent (y/y) to IDR 378 billion. Therefore Indopremier Securities advises investors to buy Kino Indonesia's shares.
The decision of Indonesia's central bank (Bank Indonesia), last week, to cut its key interest rate (BI rate) by 0.25 percent to 7.00 percent and to cut the reserve-requirement ratio for commercial banks' rupiah deposits by 1 percent to 6.5 percent is a decision that should boost household consumption in Indonesia in 2016, improve people's purchasing power, give rise to a stronger automotive and property sector, and boost liquidity at local banks (hence providing room for an acceleration of credit growth in Southeast Asia's largest economy).
The Indonesian economy expanded 5.04 percent year-on-year (y/y) in the fourth quarter of 2015, slightly beating analyst expectations and constituting the highest quarterly growth pace since Q1-2014 thus providing optimism that Indonesia's economic growth will finally be able to accelerate in 2016 after six years of economic slowdown (therefore Indonesia's benchmark Jakarta Composite Index surged a staggering 2.85 percent on Friday). In full-year 2015 the economy of Indonesia expanded 4.79 percent (y/y), the slowest growth pace since 2009.
The Indonesian economy, from the expenditure side, is highly dominated by domestic demand. From Q1-2010 to Q1-2015, the average role of domestic demand reached 99.5 percent, with the lowest level at 96.8 percent. The positive side of this situation is that the Indonesian economy is relatively resilient to external factors. History shows that despite the US subprime mortgage crisis and financial crisis in Europe, economic growth in Indonesia remained relatively high and consistent compared to other countries.
In his presentation at the Indonesia Investment Summit 2015, organized in Jakarta on 15-16 January, Standard Chartered Bank Senior Economist Fauzi Ichsan said that despite the challenges amid global uncertain times, there remains plenty room and opportunity for Indonesia to grow robustly on the long-term. In fact, by 2030 Ichsan believes that Indonesia will be among the world's top ten countries in terms of largest economies. For investors it is important to understand the challenges and key pillars of economic growth.
