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Analysis: Understanding consumption class dynamics
Some components of household expenditure that were affected by large-scale social restrictions and were not a kind of basic necessity experienced a sharp decline. Consumption for clothing fell 3.3 percent and transportation fell 1.81 percent, while restaurants and hotels grew only 2.4 percent, 60 percent lower than the average growth in previous periods, which was usually around 6 percent.
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ast May, Statistics Indonesia (BPS) announced that Indonesia’s first quarter economic growth was only 2.97 percent year-on-year, 41 percent lower than the growth rate in 2019’s first quarter at 5.07 percent. By component, household consumption expenditure, which used to grow at around 5 percent, only grew by 2.84 percent, hence the drop to about 44 percent.
Some components of household expenditure that were affected by large-scale social restrictions and were not a kind of basic necessity experienced a sharp decline. Consumption for clothing fell 3.3 percent and transportation fell 1.81 percent, while restaurants and hotels grew only 2.4 percent, 60 percent lower than the average growth in previous periods, which was usually around 6 percent.
Even so, some components still grew quite high, especially those related to basic needs such as food (5.1 percent), household equipment (4.5 percent) and health and education, which actually grew (7.9 percent).
Overall, household consumption expenditure continues to be the main pillar of economic growth, with its contribution increasing slightly from 54 percent in 2019 to 55 percent in the first quarter of 2020. With household consumption still the mainstay of economic growth, how is the consumption class map in Indonesia, especially in relation to the economic slowdown caused by the COVID-19 pandemic?
In this regard, the World Bank has classified consumption classes into five different classes, i.e. poor, vulnerable, aspiring middle class, middle class and upper class, mostly based on the level of expenditure per capita.
We estimate the population of the middle class – consumption per capita between Rp 1.2 million (US$83.04) and Rp 6 million per month – to be around 84.2 million people (32 percent), about 1 in every 3 residents. This number increased from 52 million in 2016 based on World Bank estimates. Meanwhile, the majority of the population belongs to the aspiring middle class (per capita expenditure between Rp 532,000 and Rp 1.2 million), reaching almost 126 million residents (47 percent). In other words, about 1 in 2 residents is part of the aspiring middle class. The upper class is estimated at 1.8 million people (1 percent), the vulnerable at 40.2 million people (15 percent) and the poor at around 15.2 million people (6 percent).
This amount is certainly dynamic, depending on many conditions, especially the dynamics of economic development. Given the massive impact of the pandemic on the business sector, we have tried to provide an estimate on the dynamics of the consumption class in Indonesia in the midst of the current economic slowdown. The estimation is made specific only to the people who work as employees. According to a BPS survey, the number of employees is 51.6 million, equivalent to 41 percent of the total in 2019. Nearly 60 percent of them are in Java, with one-fifth in West Java. The majority are high school graduates (22 percent), followed by those with a bachelor’s degree (18 percent) and vocational high school graduates (18 percent).
With the current economic slowdown, what if there is a decrease in employee income? We estimate that the number of employees in the poor and aspiring middle class will double if there is a 30 percent reduction in employee income. The biggest increase will come in the aspiring middle class, where the number will increase by 8.1 million to reach 17.9 million. Meanwhile, the poor, although representing only around 3 percent of the employee population, will double its number to reach 3.15 million people. If income falls by half, the aspiring middle class would increase more than twice, thereby making the middle class go down by half. Given the large aspiring middle class population, helping them grow will increase the chance of expanding the middle class.
Meanwhile, a decrease of half the total income would triple the population of those classified as poor, making its proportion rise to 9 percent. The poor group is predominantly in East Java (18 percent), mainly from Jember, Banyuwangi and Malang, as well as West Java (15 percent), with the majority coming from Bogor, Garut and Bandung regencies. One-third of them work in the education sector, as well as in manufacturing and other service industries, reaching 14 percent each. Based on work type, the majority work as professionals, in manual labor and as salespeople, while more than half are part-time workers whose working hours are less than 35 hours a week.
As the COVID-19 pandemic continues on, the economy is expected to continue to decelerate with the peak likely to occur in the second quarter. Going forward, it is important to continue exploring the dynamics of consumption classes in Indonesia, given the enormous contribution of consumption to Indonesia's economic growth. In addition, in the midst of the economic downturn, a good understanding of consumption class dynamics will be key and an important priority for stakeholders in making timely, targeted and temporary policies, programs and various economic stimulus packages.
