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[ANALYSIS] 2021 consumer spending: Will it recover solidly?
Consumer spending contracted in the last two quarters of 2020 by around 4.75 percent year-on-year (yoy), mostly due to large-scale social restrictions (PSBB), which started in the second quarter.
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A butcher checks his phone while waiting for buyers at the West Tebet Market in South Jakarta. (JP/Seto Wardhana)
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ndonesia’s consumers have long been known as some of the most promising in the world. In a 2013 report, McKinsey stated that some 90 million Indonesians would join the consumer class by 2030, more than in any emerging nation save for China and India, and that that would mean an additional US$1 trillion in annual spending. Indonesia’s consumer spending contributes around 54 percent of the nation’s total gross domestic product (GDP) and has been the backbone of the economy during the pandemic. Despite its huge potential, consumer spending was hit severely by the COVID-19 outbreak, the first time since the 1998 Asian financial crisis.
Consumer spending contracted in the last two quarters of 2020 by around 4.75 percent year-on-year (yoy), mostly due to large-scale social restrictions (PSBB), which started in the second quarter. This policy had a negative on hotels, restaurants and entertainment venues.
During the pandemic, consumption behavior has changed dramatically. In April and May, consumption dropped drastically because economic activities had been paused to reduce the spread of the virus. In the second quarter of 2020, household consumption plunged to 4.04 percent, which subsequently caused a deep contraction in economic growth of 5.32 percent. Fortunately, since the relaxation of PSBB in the third quarter, household spending and some other consumption indicators, along with their proxies, have had modest rebounds.
The decline in the consumption of lower-income Indonesians – mostly people working in the informal sector – is certainly related to their income, which has been under pressure during the pandemic. Spending contractions in food and drink, as shown by Statistics Indonesia (BPS) data, has been quite worrying, as this might indicate weakening popular purchasing power.
The decline in consumption in the middle-to-top income groups – who are mostly fixed income earners or big-business players – is closely related to consumer confidence, which shows perspectives about future economic prospects.
We think this confidence has been mainly affected by the number of new positive COVID-19 cases. If the number increases, people may worry that the recovery rate will continue at a sluggish pace. Therefore, uncertainty about the economic outlook will worsen. Consumer spending in 2021 will be determined by whether health protocols are enforced widely because a high number of COVID-19 cases could cause the government to implement another round of social restrictions. We are already living in another round of social restrictions following the year-end holidays.
The restrictions have been imposed in high-risk COVID-19 regions, which include Greater Jakarta and other cities and regencies throughout Java and Bali, during a two-week period, from Jan. 11 to Jan. 25, to help minimize the spread of the virus. The decision was made in response to a rapid increase in COVID-19 cases and a rising bed occupancy rate, which means hospitals are currently overcrowded with patients.
