Even though the economy has the opportunity to grow by 5 percent, people's purchasing power is vulnerable

Depreciation of the rupiah and soaring energy prices can trigger "imported inflation" thereby weakening people's purchasing power.

KOMPAS/PRIYOMBODO

Visitors choose clothes at a shopping center in Ciledug, Tangerang City, Banten on Tuesday (9/4/2024). The increasing shopping activity of the community during the Lebaran festivities potentially drives the growth of the economy in the second quarter of 2024.

JAKARTA, KOMPAS — Economic growth Indonesia in the first quarter of 2024 is estimated to still reach the level of 5 percent as the community's economy continues to grow amid election celebrations and the momentum of Ramadhan. However, the heating up of geopolitical tensions in the Middle East is predicted to have an impact on people's purchasing power due to inflation of imported goods and disruption of global supply chains.

Referring to data from the Central Statistics Agency (BPS), the national gross domestic product in the fourth quarter of 2023 reached 5.05 percent annually. The main source of growth came from household consumption expenditures at 2.55 percent.

Researcher in the fields of Macroeconomics and Finance at the Institute for Research on Economics and Society, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI), Teuku Riefky, said that national economic growth in the first quarter of 2024 will influenced by several factors. These factors are the 2024 General Election (Pemilu), the Ramadan period, as well as global geopolitical tensions.

"So far, we see that economic growth in the first quarter of 2024 can still grow by 5 percent or more due to positive stimuli from the election and Ramadan, which mostly take place in the first quarter," he said when contacted from Jakarta on Wednesday (17/4/2024).

However, the government should be vigilant about the ripple effects of the escalating tensions in the Middle East. If this continues for too long, the purchasing power of the community in the future may potentially weaken.

According to Riefky, the prolonged escalation of conflict in the Middle East could result in energy prices increasing and the exchange rate depreciating. This in turn will trigger inflation of imported goods (imported inflation) and inflation in general because the global supply chain is disrupted.

"How big the magnitude will be will be greatly influenced by the development of the conflict itself, which is currently still very dynamic," he said.

When (later) oil prices rise, they (investors) have to recalculate costs so that we can only rely on the domestic market. Because foreign market investors are currentlywait and see.

Senior economist at the Institute for Development of Economics and Finance (Indef), Tauhid Ahmad, believes that the current global geopolitical situation will affect the prospects of foreign investment. Although the domestic situation is considered relatively conducive after the 2024 elections, domestic investment is more likely to be influenced by external factors.

Amid the current situation of global economic and geopolitical developments that are not in good condition, according to Tauhid, the flow of foreign capital into several globally-oriented sectors such as exports will be slightly hindered in the first and second quarters of 2024. In addition, the increasing tension in the Middle East is also potentially causing a surge in global oil prices.

"When (later) oil prices rise, they (investors) have to recalculate costs so that we can only rely on the domestic market. "Because foreign market investors are wait and see," said Tauhid when contacted from Jakarta.

The condition, according to Tauhid, has resulted in limited job opportunities by large companies, especially in the manufacturing industry that contributes to employment. Some of these manufacturing industries include textiles and textile products, footwear, and wood processing.

Although the domestic situation is considered relatively conducive after the 2024 elections, domestic investment is more influenced by external factors.

According to Tauhid, the global geopolitical situation will greatly affect domestic investment climate, which in turn can impact the availability of employment opportunities. The prospect of job availability is one of the indicators to measure consumers' expectations towards the future economic condition.

Also read: Impact of the Fed and Iran-Israel, Indonesia's economy is full of challenges

Consumer confidence

Based on the results of Consumer Survey Bank Indonesia (BI), the consumer confidence index in March 2024 is still in the optimistic zone at 123.8 basis points (bps) or an increase compared to the previous month which reached 123.1 bps. This consumer optimism is mainly supported by developments in the current economic conditions index (IKE) and the consumer expectations index (IEK) regarding economic conditions in the next six months.

Regarding current economic conditions, consumers remain optimistic with IKE's score as of March 2024 amounting to 113.8 bps. This optimism is driven by an increase in the current income index, job availability index, and durable goods purchasing index.

KOMPAS/RONY ARIYANTO NUGROHO

The atmosphere at the takjil food market was shocked in the Bendungan Hilir area, Jakarta, Tuesday (12/3/2024).

Although consumer expectations for the future economy are still strong, the March 2024 Consumer Confidence Index (IEK) of 133.8 basis points decreased compared to February 2024 which reached 135.3 basis points. The decline is mainly due to the negative growth of the index of job availability expectations and business activity expectations, each of which is 3 basis points and 2.2 basis points, respectively.

Tauhid explained that the decrease in IKK in March 2024 indicates that the purchasing power of the community is not so strong amid the push for consumption during Ramadan. This is due to the increase in the prices of basic foodstuffs reflected in the inflation rate in March 2024, which reached 3.05 percent annually.

"There is indeed optimism, but not significant. Perhaps there is hope during Eid al-Fitr as the circulation of money increases with holiday bonuses, aid, and zakat which may slightly increase the community's purse, but not by much," said Tauhid.

Also read: Elections and Eid Support the Economy at the Beginning of the Year

Nevertheless, the IKK has a relatively small correlation to the purchasing power of society. This is reflected in the IKK during 2023, which was in the range of 123-123 bps or above the optimistic threshold, while the household consumption expenditure growth rate during the same period was only 4.82 percent, which is below the average of 5 percent.

On the other hand, consumer confidence index (CCI) during the first quarter of 2024 tended to decrease. Since the beginning of the year 2024, CCI recorded 125 basis points, then decreased to 123.1 bps in February 2024, and slightly increased to 123.8 bps in March 2024. This could indicate a decrease in consumer confidence which, in turn, will affect purchasing power.

BANK INDONESIA

The infographic shows the results of Bank Indonesia's Consumer Survey in March 2024. The survey indicates an increase in consumer confidence in March 2024 by 123.8 basis points (source: Bank Indonesia).