• Indonesia’s urban consumers are likely to limit big-ticket purchases in the first half of the year on concerns about weakness in household income growth. Our Household Income Index has fallen to the lowest level in its four-year history.
  • Weak global demand and low commodity prices have also damaged expectations for the country’s economy. Our Economic Sentiment Index for Indonesia, which gauges consumers’ outlooks for the economy over the coming six months, fell for the second consecutive quarter.

Throughout 2016, the Indonesian economy struggled under weak global demand and low commodity prices, affecting sectors heavily reliant on exports such as coal, palm oil and textiles. Some companies have cut production and laid off workers, hurting household income, while urban consumers have faced higher prices for imported goods such as cereals and cars, due to currency depreciation.

Our Household Income Index — which tracks how consumers perceive their household income relative to what it was a year earlier — fell to 71.5 in the fourth quarter of 2016, its lowest level in the four years that we have been monitoring consumer sentiment in the country (see chart).

Of the 25 Indonesian cities that we surveyed in December, six had an unusually high percentage of respondents reporting a year-on-year decrease in monthly income. All six are located in Indonesia’s main commodity-producing islands of Kalimantan (Balikpapan, Pontianak and Samarinda) and Sumatra (Padang, Palembang and Pekanbaru).

The total value of Indonesian exports — mostly coal and palm oil — has been contracting since 2012. In the first 11 months of 2016, exports fell 7.4 per cent compared with the same period a year earlier. Although Indonesia is expected to benefit from a recent pick-up in commodity prices, exports are likely to remain under pressure from weak global demand, particularly from China.

Our measure of economic sentiment in the country slipped for the second consecutive quarter in December. We recorded a similar weakening in sentiment in other Southeast Asian countries, though Thailand bucked the trend (see chart).

Income weakness dragging on spending, borrowing

As income growth falters, discretionary spending growth is inevitably following suit. Our Discretionary Spending Index for Indonesia fell to a four-year low of 67.6 in the fourth quarter. This is in line with our prediction in August that economic pessimism would drag on consumer spending in 2017, particularly on luxury goods.

We have also previously flagged an increase in the propensity to save in Indonesia, as well as a falling appetite for borrowing. Our latest indicators on consumer borrowing suggest that it weakened further in the fourth quarter (see chart).

We believe consumer lending growth will moderate further in the next six months, though it could rebound slightly in the second half of the year. Consumer borrowing was up a modest 6.7 per cent year on year in October, down from 9.9 per cent a year previously and 19.7 per cent in October 2014 (see chart).

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.