The government’s expectations on accelerating economic growth in the second half of this year are likely to fade. Indications can be seen from the results of consumer and business surveys. The unpreparedness of the integrated online business licensing system may also hinder investment, which is the second largest contributor to economic growth.
Bank Indonesia (BI) this week released the results of its consumer confidence survey for August 2018. The consumer confidence index (IKK) was again down, to 121.6 from 124.8 the previous month, although remaining above 100 shows consumers are still optimistic.
The decline in the consumer confidence index was mainly influenced by weakening confidence in income, availability of employment, and purchase of durable goods. In particular, the employment availability index has remained at a pessimistic level since March. As of August 2018, the index stood at 93.9.
Shrinking consumer confidence over economic conditions for the next six months (to February 2019) also influenced the decline in the consumer confidence index.
The results of the consumer survey are in line with a similar survey previously released by the Central Statistics Agency (BPS). In this survey, the estimation of the consumer tendency index in the third quarter was only 96.99, falling from the previous two quarters of 103.83 (first quarter) and 125.43 (second quarter). This reflects consumer pessimism.
According to BPS, there is pessimism due to an estimated decline in income and a reduction in plans to purchase durable goods, such as electronics, jewellery, vehicles, and homes, as well as recreation and celebrations or parties.
BPS also predicts a decline in the business tendency index in the third quarter in almost all business fields, except transportation and warehousing, and other service categories that tend to be stagnant. Overall, the business tendency index was 106.05 - not as strong as the first quarter (106.28) and second quarter (112.82).
Referring to the consumer and business tendency index, the Institute for Development of Economics and Finance (Indef) said there is a threat of stagnation in economic growth in the second half of this year. The forecast for the prompt manufacturing index (PMI) in the third quarter is also weakening, as seen from BI’s survey on business activities (SKDU).
The manufacturing industry sector is the main support or prime mover of the economy. “When the industrial sector only grew 3.97 percent YoY [year-on-year] and the non-oil and gas industry only 4.41 percent, it is difficult to expect acceleration of economic growth.”
Investments Turn into Obstacles
Centre of Reform on Economics (Core) Indonesia Research Director Pieter Abdullah Redjalam predicts the deterrent factor in the economy will come from sluggish business investment. So far, investment is the second contributor to economic growth after household consumption.
According to Pieter, the cause is inconsistency in the implementation of the Online Single Submission (OSS). As a consequence, the new system actually inhibits business licensing, which also has a further impact on investment. “Sluggish investment has a negative impact on growth,” he told D-Inside.
The government began implementing the OSS system in early July. It has the support of entrepreneurs, but its implementation without transition reaped criticism, and the decision was deemed to hamper the licensing process. There have been rumours of licensing that could not be processed through the new system.
According to Pieter, the challenge of rising interest rates also affects investment, even though it is insignificant, including the weakening of the rupiah against the US dollar. This is because there are industries that actually benefit from the weakening of the exchange rate so that they are encouraged to expand.
On the other hand, household consumption as the main contributor to economic growth is estimated to remain stable. Pieter refers to BI’s consumer confidence index that is declining but is still in an optimistic zone. Inflation is also expected to be maintained at a low level to support consumer purchasing power.
This is why Pieter predicts economic growth in the second half will be 5.05 percent-5.15 percent, lower than 5.17 percent in the first half. This means the risk is not only the stagnation of economic growth, but it can also lead to a slow down in the second half of 2018. This is what threatens the government’s economic growth target of 5.2 percent.