The prospects for the global economy in 2009 are not very bright. Many countries are expected to be in recession this year. As such, it is unreasonable for Indonesia to believe that global demand will help underpin Indonesia's economic growth this year.

This gives rise to the question: is Indonesia's domestic demand strong enough to help prevent the Indonesian economy from falling into recession?

To begin with, we need to appreciate that the United States economy is in bad shape. Officially, the US economy has even been in recession since December 2007!

The US economy is expected to remain in the doldrums in 2009. The weak US housing market might suggest that a rebound in the US economy is still some way off. As a result, the global economy is likely to remain weak in the near term. This has implications for Indonesia.

Sluggish global demand is also borne out by weak consumer confidence. The Consumer Confidence Index for both the US and Japan have been falling since July 2007. And in November 2008, these indexes were close to historically low levels.

This suggests that US and Japanese households are going through very tough times, or, in other words, they are suffering from weak purchasing power.

Weak household purchasing power bodes ill for the economies of the US and Japan since household spending contributes significantly to those economies (in the US, household spending constitutes around two-thirds of GDP).

With gloomy prospects for the global economy, Indonesia will therefore have to depend on strong domestic demand to prevent the economy from falling into recession. But how strong are the finances of Indonesian households? And are these households ready to spend more so that the economy does not slip into recession?

High commodity prices hit the purchasing power of Indonesian consumers in the first half of 2008. And the May 2008 fuel price hikes eroded purchasing power further.

The erosion in consumer purchasing power was captured by Danareksa's Consumer Confidence Index (CCI). Note that the CCI had been in a downtrend from the end of 2007 due to rising prices of foodstuffs.

And the fuel price hikes dragged down the CCI even further to a level of 65.3 in June, or its lowest level in the history of the survey.

These declines in the level of the CCI reflected weaker consumer purchasing power due to the increases in prices, and if the CCI had stayed at depressed levels for a longer period of time, then the economy would have entered a recession. This is especially true given that household spending accounts for around 65 percent of GDP.

Fortunately, there are indications that household purchasing power has improved, as is evident in the movements of our CCI, which started to recover in July 2008.

The CCI continued to rise in the following months, and by October 2008 it had reached a level of 80.3. The CCI rose further in November to its highest level in the last year. Falling prices of rice and other foodstuffs have given a boost to consumer purchasing power.

The CCI retreated 3.4 percent to 78.6 in December. Both components of the CCI registered declines.

Nonetheless, the declines in December are relatively small and suggest the weakening global economy only had a limited impact on consumers. We do not believe that this marks the start of a new downtrend for the CCI. One major issue weighing on consumers had been high fuel prices. However, these concerns have dissipated following the correction in crude oil prices.

The government's decision to cut prices of subsidized gasoline fuel in December 2008 and January 2009 gave a timely boost to consumer confidence. As a result of these fuel price cuts - and falling commodity prices as well - inflation is likely to be benign in 2009. As such, consumer purchasing power should improve going forward.

The US experience tells us that fiscal and monetary stimuli are not effective in promoting household spending if consumer confidence is weak. Yet unlike in the US and Japan - where confidence levels are at historic lows - the confidence of Indonesian households has rebounded sharply from its historic lows. As such, the purchasing power of Indonesian households is relatively healthy. Thus, there is good reason to believe that fiscal and monetary (interest rate cuts) stimuli should be effective in spurring household spending in Indonesia.

Against this backdrop, consumer spending is likely to remain relatively firm in 2009 . The fears of recession are admittedly there. But consumers may yet save the day.

The writer is the chief economist at Danareksa Research Institute.

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