We have observed shifts in consumer spending patterns in Indonesia, with a general trend of cautious spending among the middle class,” said Boy Lukito, chief executive of Sarimelati Kencana, the franchisee operator in Indonesia.
Businesses selling everything from pizzas to cars have been hit by Indonesia’s shrinking middle class. The number of people considered to be middle class by the government has declined 20 per cent over the past six years, a risk to the commodity giant’s growth plans and a warning for potential investors such as Apple.
The number of Indonesians in the middle class had fallen to 47.9mn by March 2024, down from a peak of about 60mn in 2018, according to the most recent government data. Indonesia defines its middle class as those who spend Rp2mn-Rp9.9mn ($122-$605) a month. In the four years to 2018, the middle class grew by 21mn.
Economists said the decline had been triggered by a lack of formal employment, a shortage of investment in higher-income industries and overreliance on a commodities sector that has produced poorly paid work — pressures that have been exacerbated by the Covid-19 pandemic.
Indonesia is the world’s largest producer of nickel, a metal critical to stainless steel manufacturing and electric vehicle batteries. Foreign direct investment has increased in recent years, but much of that growth is linked to mining and mineral processing following Indonesia’s export ban on nickel ore. The country is also a large exporter of coal and palm oil.
“The issue is that [the government is] focusing too much on commodities. Manufacturing is better than commodities because prices are more stable and the added value creation is higher,” said Teuku.
Indonesia has long lagged its south-east Asian peers such as Vietnam and Malaysia in building a manufacturing sector and has failed to benefit from the production shift away from China.
Despite recent reforms, Indonesia’s local content requirements, import restrictions on some raw materials and erratic changes in some policies including earnings retained in the country have impeded investment, said the American Chamber of Commerce in Indonesia in a recent report.
Government welfare measures in recent years such as cash transfers have targeted the bottom 40 per cent of the economy. Former finance minister Chatib argued the solution for the shrinking middle class would be to create jobs in the formal sector, not just offer welfare measures.
“That is why attracting foreign direct investment is crucial,” he said. “We have to boost productivity and competitiveness, reduce red tape, improve the investment climate, continue to build infrastructure and focus FDI on export-oriented sectors.”
Consumer spending has declined in recent months, and Indonesia saw month-on-month deflation last year for five straight months, though prices have since returned to growth. In January, the central bank lowered growth forecasts for 2025 and unexpectedly cut interest rates to bolster the economy.
“What we are seeing now is that the middle class is more keen on saving and holding off spending,” said Budihardjo Iduansjah, chair of the Indonesia Retail and Tenant Association, adding that traffic in shopping malls had dropped and retailers were finding it difficult to sell goods if they raised prices.
An automobile manufacturers’ association has blamed the weaker purchasing power for a 14 per cent drop in car sales last year. Analysts are increasingly warning of the risk to retailers from a diminished middle class
Icy-Magician-8085 on
I honestly wish there was more news coming out of Indonesia for such a large country.
It has massive potential but largely just sits on the sidelines of geopolitics for better or for worse.
2 Comments
We have observed shifts in consumer spending patterns in Indonesia, with a general trend of cautious spending among the middle class,” said Boy Lukito, chief executive of Sarimelati Kencana, the franchisee operator in Indonesia.
Businesses selling everything from pizzas to cars have been hit by Indonesia’s shrinking middle class. The number of people considered to be middle class by the government has declined 20 per cent over the past six years, a risk to the commodity giant’s growth plans and a warning for potential investors such as Apple.
The number of Indonesians in the middle class had fallen to 47.9mn by March 2024, down from a peak of about 60mn in 2018, according to the most recent government data. Indonesia defines its middle class as those who spend Rp2mn-Rp9.9mn ($122-$605) a month. In the four years to 2018, the middle class grew by 21mn.
Economists said the decline had been triggered by a lack of formal employment, a shortage of investment in higher-income industries and overreliance on a commodities sector that has produced poorly paid work — pressures that have been exacerbated by the Covid-19 pandemic.
Indonesia is the world’s largest producer of nickel, a metal critical to stainless steel manufacturing and electric vehicle batteries. Foreign direct investment has increased in recent years, but much of that growth is linked to mining and mineral processing following Indonesia’s export ban on nickel ore. The country is also a large exporter of coal and palm oil.
“The issue is that [the government is] focusing too much on commodities. Manufacturing is better than commodities because prices are more stable and the added value creation is higher,” said Teuku.
Indonesia has long lagged its south-east Asian peers such as Vietnam and Malaysia in building a manufacturing sector and has failed to benefit from the production shift away from China.
Despite recent reforms, Indonesia’s local content requirements, import restrictions on some raw materials and erratic changes in some policies including earnings retained in the country have impeded investment, said the American Chamber of Commerce in Indonesia in a recent report.
Government welfare measures in recent years such as cash transfers have targeted the bottom 40 per cent of the economy. Former finance minister Chatib argued the solution for the shrinking middle class would be to create jobs in the formal sector, not just offer welfare measures.
“That is why attracting foreign direct investment is crucial,” he said. “We have to boost productivity and competitiveness, reduce red tape, improve the investment climate, continue to build infrastructure and focus FDI on export-oriented sectors.”
Consumer spending has declined in recent months, and Indonesia saw month-on-month deflation last year for five straight months, though prices have since returned to growth. In January, the central bank lowered growth forecasts for 2025 and unexpectedly cut interest rates to bolster the economy.
“What we are seeing now is that the middle class is more keen on saving and holding off spending,” said Budihardjo Iduansjah, chair of the Indonesia Retail and Tenant Association, adding that traffic in shopping malls had dropped and retailers were finding it difficult to sell goods if they raised prices.
An automobile manufacturers’ association has blamed the weaker purchasing power for a 14 per cent drop in car sales last year. Analysts are increasingly warning of the risk to retailers from a diminished middle class
I honestly wish there was more news coming out of Indonesia for such a large country.
It has massive potential but largely just sits on the sidelines of geopolitics for better or for worse.