Indonesian consumers grew deeply pessimistic in May as the COVID-19 pandemic-related layoffs eroded people’s confidence in the economy. A Bank Indonesia (BI) survey showed that the consumer confidence index (IKK) has dropped to its lowest level in nearly 15 years, weighed down by negative perceptions of the current economic situation and a dearth of jobs. The index fell to 77.8 in May, falling further from 84.8 in the previous month, indicating consumer pessimism about the domestic economy’s prospects. An IKK value above 100 reflects general hopefulness, while a value below 100 signifies pessimism.
“Consumer optimism about job availability dropped as companies laid off their employees amid the COVID-19 pandemic,” the central bank stated in the report, which was released on Friday. As of May 27, more than 1.79 million people had lost their jobs as many non-essential businesses shut down to comply with government restrictions, according to data from the Manpower Ministry.
The low consumer confidence may signal that consumer spending, which normally accounts for more than half of the country’s GDP, will contract this year. Consumer spending grew by just 2.84 percent year-on-year in the first quarter, a far cry from 5.01 percent growth recorded in the same period last year. Meanwhile, the country’s economy grew by only 2.97 percent in the first quarter, the weakest since 2001, because of cooling household spending and investment during the pandemic.
“For the next six months, however, consumers remain upbeat about economic conditions supported by the prospect of job availability and higher income as the COVID-19 pandemic subsides,” the report reads. To support the country’s economic recovery, the government will widen the budget deficit to 6.34 percent of GDP this year to cover a stimulus package of Rp 677.2 trillion (US$47.7 billion) aimed at jump-starting economic recovery. This month, the government has gradually reopened the economy in a bid to minimize job losses and boost economic activity, but observers see the move as risky, and the number of new cases has continued to soar over the past few days.
“The survey paints a bleak picture as consumers have yet to see a robust economic recovery,” Bank Central Asia (BCA) chief economist David Sumual told The Jakarta Post. “The impact of government and BI policies will be small if consumers remain pessimistic.” He said that a recovery of consumer confidence would depend on the trajectory of the health crisis, adding that spending habits would not return to normal if the virus threat still loomed. “We expect household spending to decline this year, but the severity of the shock will depend on whether the government’s decision to reopen the economy is effective,” Sumual said. He expected household spending to shrink between 1 and 6 percent in 2020.
Indonesia’s economy is expected to grow 1.8 percent this year if reopening the economy does not trigger a second wave of the virus. It may contract 2 percent under the worst-case scenario. Recently, the Organization for Economic Cooperation and Development (OECD) predicted that Indonesia’s economy would shrink by 3.9 percent if it was hit by a second wave of COVID-19. “If the labor market rebound is weaker and slower than expected, higher unemployment may weigh on domestic demand and delay the recovery,” the OECD report read.
Center of Reform on Economics (Core) Indonesia research director Piter Abdullah said the low consumer confidence was a result of weakening purchasing power. “The government should first reassure public that the COVID-19 outbreak will be contained in the near-term,” Piter told the Post. “Furthermore, it must ensure that the economic stimulus will be effective at accelerating economic recovery.”
