Purchasing Power Declines, Public Consumption at the Beginning of the Year is Hampered

If people's purchasing power is fine, economic growth at the beginning of this year should be more than 5.11 percent.

KOMPAS/PRIYOMBODO

Traders pass the time by looking at content on their mobile phones while waiting for buyers at Kebayoran Lama Market, South Jakarta, on Wednesday (13/12/2023). Indonesia's economic growth in 2024 is projected to be corrected due to the impact of global economic slowdown and erosion of purchasing power of the community due to inflation of food prices.

JAKARTA, KOMPAS — The growth of household consumption as the main engine of the economy tends to slow down after the pandemic. People's purchasing power is under increasing pressure due to rising prices of basic necessities and stagnant income. In the future, new strategies are needed to leverage the purchasing power of the middle class and control inflation.

The weakening of people's purchasing and consumption power can be seen from the economic growth data released by the Central Statistics Agency (BPS) earlier this week. Even though at first glance the economy grew solidly at 5.11 percent during the first quarter of 2024 (January-March), household consumption as the "backbone" of the economy grew not optimally.

During January-March 2024, the community's consumption only grew by 4.91 percent annually. This figure is indeed higher than the 4.47 percent growth in the fourth quarter of 2023 and 4.53 percent in the first quarter of 2023. However, the growth in consumption is still below the economic growth rate or the "normal" level of 5 percent.

Also read: The Economy is Growing, but Not Yet Stable and Quality

Several seasonal factors such as the Ramadan moment, the general elections, and the preparation for the Eid al-Fitr that occurred throughout January-March did not significantly increase community consumption above 5 percent.

According to macro economics and finance researcher at the Institute for Development of Economics and Finance (Indef), Riza Annisa Pujarama, public consumption that is not "helped" by temporary factors indicates that there is a problem that more fundamental to people's purchasing power.

"There are many moments that can actually increase household consumption. If the purchasing power of the community is still good, our economic growth in the early part of this year should be more than 5.11 percent," he said in a virtual discussion on Tuesday (May 7, 2024).

Riza said, throughout the first quarter of 2024, people's purchasing power was pressured by the increase in prices of basic necessities, especially food. Quoting BPS data, price component inflation is volatile (volatile food), which shows that price increases in food commodities are indeed relatively high, even contributing to the largest inflation in the January-March 2024 period.

If people's purchasing power is fine, our economic growth at the beginning of this year should be more than 5.11 percent.

In January 2024, the inflation rate of price components fluctuated by 7.22 percent annually, increased to 8.47 percent in February 2024, and skyrocketed to 10.33 percent in March 2024. The commodities that contributed the most to inflation were rice, broiler chicken, red chili, broiler eggs, garlic, and tomatoes.

Meanwhile, when the prices of goods increase, people's income tends to remain stagnant. As a result, the community tends to restrain their spending at the beginning of the year. This is evident from the performance of several sectors such as clothing and footwear, which usually experience rapid growth during Ramadan and leading up to Eid al-Fitr, but in the first quarter of 2024, the growth rate slowed down.

KOMPAS/PRIYOMBODO

Visitors shop for cakes at the BSD intermodal modern market in Cisauk, Tangerang Regency, Banten, Saturday (4/5/2024).

Indef researcher, Ahmad Heri Firdaus, stated that the rate of food inflation is far higher than the average growth of community income. As an illustration, the average wage of laborers during the period of February 2023-2024 only increased by 3.27 percent.

"The wage increase is less than 5 percent, but the inflation rate for food commodities is above 5 percent. Meanwhile, most workers' income, up to 80 percent of it, is spent on food shopping," he said.

Also read: 2024 Eid Anomaly: People Restrain More Consumption

The government has prepared a number of policies to boost the purchasing power of the community during the first quarter of 2024. For example, through massive social aid distribution and policies to increase the salaries of civil servants (ASN) and pay for holiday allowances. As a result of these policies, government spending in January-March grew rapidly by 19.9 percent.

However, despite the various policies, they still have not significantly increased consumption. "The function of government spending should be a stimulus. Not just spending from the state budget, but also must be able to drive other economic sectors. This is a future challenge for thinking of other policies that are more effective in maintaining purchasing power and controlling inflation," he said.

Battered after the pandemic

Household consumption growth has indeed seen a slowdown trend since the Covid-19 pandemic. For comparison, in the 2018-2019 period, consumption deceleration below 5 percent usually only occurred in one quarter throughout the year. Consumption is still able to grow equal to or above economic growth.

However, after the pandemic, household consumption has become less frequent, not reaching 5 percent. Consumption in 2022-2023 only reached 5 percent in quarters II and III, but decreased below the economic growth rate in quarters I and IV. The same pattern is repeated again at the beginning of 2024.

Over the last three years, people's purchasing power has been hit repeatedly by increases in the prices of basic necessities.

According to Riza, this is happening because the purchasing power of the community over the past three years has been hit with a series of price increases for goods. Starting from the increase in fuel prices in 2022, the price of cooking oil in 2021-2022, fluctuating food prices in 2023 until early 2024, as well as an increase in the price of other goods.

On the other hand, the middle class also has to set aside their money to pay for other bills such as taxes, installments, and credits, which have recently increased due to economic uncertainty. "That is why household consumption is increasingly difficult to grow above 5 percent because the community has been hit by a series of pressures after Covid-19," he said.

KOMPAS/PRIYOMBODO

Residents who wanted to shop for food crowded food stalls in the Petamburan area, Tanah Abang, Central Jakarta, Monday (12/9/2022).

New strategy

Indonesian Employers' Association (Apindo) Economic Policy Analyst Ajib Hamdani said that household consumption will continue to experience pressure as long as people's purchasing power and inflation are not maintained. "If the inflation trend does not decrease, purchasing power will continue to experience pressure and our economic growth will tend not to be sustainable," he said.

Therefore, new policy breakthroughs are needed to support and boost the purchasing power of the community. According to Ajib, the government cannot rely solely on conventional methods such as distributing social assistance. Moreover, in the future, pressure on the purchasing power of the community will be felt by the middle class.

Also read: Many Turmoil at the Beginning of the Year, Indonesia's Economic Resilience is Tested

One of them is the plan to increase Value Added Tax (VAT) from 11 percent to 12 percent on January 1, 2025. According to him, it will add even more pressure on businesses as well as the community who will bear the burden of increased commodity prices.

"If the government doesn't provide targeted incentives, our economic growth (this year) will only be around 5.2 percent, which is below the target," said Ajib.

Meanwhile, Finance Minister Sri Mulyani said that the government will anticipate several global risks that must be faced in the future. These risks include the direction of United States' monetary tightening policy, which could have an impact on the weakening of the rupiah and the increase of domestic prices of goods, the escalation of geopolitical tensions in various regions, and disruptions in the global supply chain.

"The government will continue to monitor and evaluate the potential impact of global dynamics on the domestic economy and fiscal conditions. "The APBN will continue to be optimized as a shock absorber to maintain people's purchasing power and the momentum of economic growth," he said.