Mon, 23 Sep 2002

'Weakening consumption poses a threat to economic growth'

A'an Suryana, The Jakarta Post, Jakarta

Analysts are divided on whether the latest data on a decline in sales of electronic goods and cigarettes indicates a weakening of domestic consumption.

Centre for Strategic and International Studies (CSIS) economist Pande Radja Silalahi said falling sales were a strong indication that consumption was weakening, which could become a serious threat to this year's economic growth if the trend continued.

He said that people were reluctant to spend money on durable goods because they were pessimistic about the performance of the economy, particularly in the area of investment and exports.

"Weakening consumer spending reflects popular pessimism over the country's economic performance," Pande told The Jakarta Post on Sunday.

"In view of the lackluster performance people then choose to save their money rather than spend it on durable goods," he added.

This paper recently quoted data from an association representing electronics businesses that sales of electronic goods during the month of July and August had declined by up to 26 percent. Industry experts have said that massive layoffs have weakened consumer purchasing power, which, in turn, has hit sales of electronic goods.

Sales of cigarettes have also been on a downward trend, with full-year sales figures expected to drop by 20 percent from last year's 206 billion sticks, according to the industry association.

This data has triggered concern that domestic consumption, which was expected to become the main driver of this year's economic growth, is waning.

The government has projected this year's growth at 4 percent.

The Asian Development Bank, in its 2002 Outlook Update report, also highlighted weakening consumption in the country.

According to one estimate, domestic consumption is expected to contribute around 75 percent of the country's gross domestic product (GDP).

However, Standard Chartered Bank economist Fauzi Ichsan said that it was too early to tell whether declining sales in electronic goods and cigarettes were signs of slowing domestic consumption.

"We must be careful before jumping to such a conclusion," said Fauzi.

"If the decline (in sales) occurs for three months (consecutively), it might be true that the consumer spending is weakening," he added.

He agreed, however, that weakening domestic consumption could present a serious threat to the economy.

Meanwhile, Pande urged the government to immediately improve the domestic investment climate so that companies would start making new investment, which, in turn, could revive public confidence in the economy and help push up sales of durable goods.

"The government must move quickly to address legal uncertainties here," he said.