The country'€™s current economic slowdown is of concern to all interested parties, including investors and the government as a regulator. The economy in the first half of 2015 grew by 4.7 percent year-on-year (yoy), the slowest first-half economic growth in the last five years.

In terms of its constituent components, growth in household consumption slowed to a level of 5 percent yoy, representing its lowest first-half growth rate since 2012. Data on gross domestic product (GDP) by sector composition also show that most sectors in the business sphere have slowed over the same period, including consumer-related industries.

This is especially significant, given that consumption is one of the backbones of the Indonesian economy. The role of the domestic market-based consumer sector is also increasingly important as a driver of economic growth at a time when exports have weakened as a result of the global economic slowdown amid conditions of high uncertainty.

There are several indicators that demonstrate a slowdown in the consumer sector. The first of these is the level of consumer confidence, as measured by the consumer confidence index/CCI issued by various institutions. The CCI'€™s downward trend, as illustrated in Bank Indonesia consumer surveys, began in March 2015 when it fell to 116.9 points from 120.2 in the previous month. In fact, several consumer confidence indices based on respondents'€™ spending levels had already shown negative annual growth in the index since the beginning of the year (CCI with respondents'€™ spending levels of Rp 1-2 million, Rp 2-3 million and more than Rp 5 million).

On a regional basis, the average CCI over the first eight months of this year also showed negative annual growth in 16 of 18 cities surveyed. Meanwhile, AC Nielsen ranked Indonesia'€™s CCI third (after India and the Philippines) among 60 countries surveyed in the second quarter of 2015, with a CCI level of 120. The ranking was down from the first quarter, when Indonesia was ranked second (after India) with a CCI level of 123. The decline in Indonesia'€™s CCI was also confirmed by the MasterCard Index of Consumer Confidence for the first half of the year, which recorded a decrease of 25.8 points in Indonesia'€™s CCI from the previous half. Although it is still included in the optimistic category, Indonesia'€™s CCI has seen a decline greater than that in any comparable country.

Secondly, the slowdown in consumption has been evident in the trend of declining annual growth in the real retail sales index for certain groups of goods, as measured by a retail sales survey by Bank Indonesia, such as motor vehicle parts and accessories and automotive fuels. The third indicator is developments in the industry index for consumer goods on the Indonesian Stock Exchange. As of late August 2015, this had decreased by 3.3 percent year-to-date (ytd). However, this rate of decline is relatively small compared with other sector indices, including the Jakarta Composite Index, which fell 13.7 percent ytd. Fourth, the slowdown in the consumer sector has also been confirmed by the financial performance of consumer sector issuers, such as consumer goods and retail industry sector issuers. Growth in sales and the operating margins of these issuers in the first half of the year showed a decreasing trend in comparison with the same period last year.

Although the consumer sector is currently experiencing a slowdown, its outlook for the medium to long term is still quite promising. There are several factors likely to act as positive catalysts for the future growth of this sector.

The first of these is the demographic structure of Indonesia: More than 50 percent of the total population is aged under 30 years. With the population predominantly made up of people of a productive age, there will be a greater supply of labor and higher labor participation rates, thereby enhancing disposable income and leading to an expected rise in public consumption. Changes in lifestyle and consumption patterns, in line with expanding urbanization and a growing middle class, will also spur the development of the consumer sector market. According to AC Nielsen, 48 percent of the total expenditure on fast-moving consumer goods is contributed by the middle class. The proportion of the population in the middle income class itself is estimated this year at 68.4 percent of the total population of Indonesia, with this figure likely to rise to 76.1 percent in 2020.

Developments in technology and in the lifestyles of the middle class offer both potential and challenges to businesspeople. Improved internet access currently allows consumers to shop conveniently without going to stores. Although the online shopping behavior of the Indonesian public is still at a relatively low level compared with other countries, e-commerce in the future is expected to expand in line with continual advancements in technology. As an illustration, the retail e-commerce market in Indonesia in 2013 already stood at US$1.3 billion. In light of this, industry players in the consumer sector are attempting to take advantage of e-commerce opportunities by using a mix of marketing strategies and appropriate branding. Businesses will need to be on their toes, as an emerging middle class '€” with better education and greater knowledge '€” will consist of highly demanding consumers who require instant information and convenience, thus leading to more innovative and competitive industries.

In short, it can be concluded that although the consumer sector is currently experiencing a slowdown, the medium- to long-term business potential of this sector remains quite promising. In addition to a large market base, economic conditions are expected to get better with the support of improved infrastructure that will act as the driver of consumer growth in the future. As proof of this, we can look at A.T. Kearney'€™s 2015 Global Retail Development Index'„¢, which ranks Indonesia in 12th place out of 30 developing countries for retail investment purposes, up from 15th last year.
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The writer is an industry analyst at Bank Mandiri.

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