The contribution of household spending to Indonesia's economic structure is still dominant, at 56.93 percent in 1Q21 and 57.66 percent in the 2020 fiscal year. However, with such high uncertainty due to the COVID-19 pandemic, will the recovery in household spending be sustainable and can it become a driver for future economic growth?

The Office of the Bank Mandiri Chief Economist estimates that household spending in 2Q21 may grow 6.57 percent yoy, a significant increase compared to the previous periods. However, this is possible given the lower base effect from last year, when household spending contracted very deeply in 2Q20. In more detail, there are several factors influencing the hike in household spending in 2Q21.

First, the seasonal factor of Ramadan and Idul Fitri celebrations in April-May 2021 boosted spending. Even though the government imposed a ban on going home, which is suspected to have had a counterproductive impact on household spending growth, the result of Mandiri Institute's research compiled from the Facebook Mobility Index shows that people's mobility in the 2021 Idul Fitri homecoming period was higher than in the 2020 period. Furthermore, there has been an increase in spending outside Jakarta, especially in areas where travelers come from, such as Probolinggo and Cimahi. This means that spending continues to grow, although not as much as previously expected if the homecoming ban is not enforced.

Second, government stimulus programs and central bank macro prudential policies were implemented in order to increase consumption. The government is committed to allocating a total budget of Rp 699.43 trillion (US$49/07 billion) to the National Economic Recovery (PEN) program in 2021, which includes the social safety net of Rp 150.88 trillion to support purchasing power and encourage consumption. As of May 25, the social safety net had reached 57.4 percent of the budget. To encourage spending, the government also provides tax incentives in the form of discounting sales tax on luxury goods for cars and reducing value-added tax for residential properties. Meanwhile, the central bank relaxed the loan-to-value property credit policy.

Third, increasing community mobility along with the progress of the vaccination program and relatively controlled COVID-19 cases have also increased spending. This is important to encourage consumer confidence in spending, especially the upper middle class. We see that the recovery in spending among the upper middle class is the key to national economic growth going forward. This is because they make the biggest contribution to national spending (>70 percent). As we know, purchasing power has fallen, causing the level of demand and spending to decrease significantly during the pandemic. While on the other hand, the upper middle class, who still have relatively good purchasing power, are reluctant to spend because they do not have confidence in future economic conditions. Therefore, we think the government needs to maintain the momentum for consumer confidence to recover going forward so that they will be eager to spend more.

Bank Indonesia’s consumer survey shows the consumer confidence level in April 2021 at 101.5, returning to optimistic levels (>100) for the first time since March 2020. Interestingly, a significant increase in the consumer confidence index was shown by the group of respondents with spending above Rp 3 million per month as a representation of the upper middle income class. In more detail, the consumer confidence index of respondents with expenditure above Rp 5 million per month experienced the highest increase of 28 percent yoy in April 2021.

Other data also confirmed the increasing spending of the upper middle class. GDP data for household spending by allocation of use recorded a fairly high growth improvement in expenditure on clothing and footwear (-2.71 percent yoy in 1Q21 vs. -5.14 percent yoy in 2Q20), durable goods and expenditure on restaurants and hotels (-4.16 percent yoy in 1Q21 vs. -16.53 percent yoy in 2Q20) and leisure needs.

In line with this, the Mandiri Spending Index shows the Department Stores and Restaurants Spending Index of the higher income class is above the pre-pandemic level. Meanwhile, in terms of retailers, the same-store sales growth of several retailers targeting the upper middle-class, such as Ace Hardware and Mitra Adi Perkasa, is better than retailers targeting the lower middle-class, for example Ramayana.

In our view, some efforts need to be made to encourage increased consumption, especially for the upper middle income bracket.

First, more serious and effective handling of the COVID-19 pandemic, including vaccine program acceleration, will determine consumer perception and confidence about current and future economic conditions. In this case, firmness, consistency and integrated government policies between sectors and institutions is needed.

Second, strategic solutions are needed to support sectors that are closely related to the upper middle income class, for example e-commerce. The upper middle class continues to drive the growth of e-commerce with the biggest penetration and spending per buyer. We appreciate the government's efforts to encourage online retail sales by providing subsidies for free shipping of up to Rp 20,000 for shopping for local products last month. This program can also be synergized with micro, small and medium enterprises so that it has a wider impact on the community.

Last but not least, the government should continue to monitor and ensure the progress of the PEN program in order to maintain purchasing power and consumption at large.

In sum, we all hope that the pandemic can end soon so that economic activity can recover and improve the welfare of the whole community.

***

Senior industry analyst at Bank Mandiri

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