November 12, 2024

Hope on the Horizon

Market Commentary

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Indonesia's economic growth took a slight dip in 3Q24, recording a 4.95% yoy growth rate, down a bit from 2Q24 at 5.05%.

GDP Growth Rate (%)

Source: Trading Economics

This figure also missed our internal forecast of 5.15% and the market consensus of 5.00%.

On a qoq basis, the economy still grew by 1.50%, but all eyes are on household spending.

For three consecutive quarters, household spending growth has struggled to break above the 5.0% mark.

This quarter, it dipped further to 4.91% from 4.93% previously

The drop in spending is particularly evident in durable goods like clothing, home appliances, and footwear.

If household spending doesn’t rebound above the 5% level soon, economic growth for 2024 might plateau at around 5.05%, with very slim chances of breaking above 5.1%.

Post pandemic, consumers have radically changed how they allocate their budgets.

People are focusing more on food and beverages, which now account for 36% of total household spending.

However, this share has slowly declined as middle to upper income families dine out more often, shifting their spending towards hotels and restaurants.

Meanwhile, for lower income families, rising food prices have forced them to tighten their belts. Budgets for essentials like food, cigarettes, and drinks have been squeezed.

In contrast, wealthier households are now prioritizing experiences like entertainment, travel, and leisure over buying durable goods like clothes or home appliances.

This poses a challenge because durable goods account for about 16% of total household spending.

If spending in this sector doesn’t bounce back, it will keep economic growth under pressure. But there’s hope on the horizon!

The government has already planned several stimulus measures for 2025, including a "free lunch" program worth IDR 71 tn and a salary hike for civil servants.

These initiatives are expected to bolster purchasing power, especially for essentials and durable goods.

If executed well, we could finally see household spending growth push past 5% again, becoming a key driver for Indonesia's economy.

While household spending remains subdued, there are silver linings.

Investments have grown steadily above 5%, which helps counterbalance the drag from weak consumer spending.

This is a positive sign, especially given the slowdown in consumption.

There’s also optimism that with the new president's inauguration, political stability will boost investor confidence.

On top of that, Bank Indonesia is expected to lower interest rates in 4Q24.

If lending rates do decrease, banks will likely be more eager to extend credit, which could further support investment spending.

So, while consumers might still be holding back on big ticket purchases, investments are poised to be the heroes for the year end.

If investments continue to grow and credit starts to flow, we can remain hopeful that the economy will maintain solid growth, even if consumer spending hasn’t fully recovered yet.

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