Indonesia: Weak Consumption Is Likely To Linger

Indonesia’s private consumption expenditure, which accounts for about 55% of GDP, has remained on a weakening path, rising by a slower 4.8% y-o-y in Q1, down from 5.1% y-o-y in 2024. The latest high-frequency data suggest weak consumer sentiment persists. Nomura’s economic analysis suggests private consumption will likely remain subdued, driven by fundamental factors such as labor market weakness and scarring effects from the pandemic.

Since the end of 2023, vehicle sales growth has contracted, but it has been worsening recently. This shows weaker spending for durables more broadly and indicates subdued discretionary spending by households.

Growth of third-party deposits at commercial and rural banks have remained low at 4.3% y-o-y in April. The main drag is individual deposit growth, which has turned negative in the last few months. This could be due to various factors, but points to deteriorating household incomes. Simultaneously, loan growth has also been moderating, led by consumption and working capital loans.

While the statistics office of Indonesia reported that the unemployment rate edged down to 4.8% in February 2025 from 4.9% in August 2024, the recent wave of layoffs is worrying for locals and weighing on sentiment. In 2024, the Ministry of Manpower reported 78,000 layoffs, up from 64,900 in 2023. As of May 20, MOM reported 26,500 layoffs year-to-date, which annualizes to 69,000.

The top three sectors with the highest layoffs were manufacturing, agriculture and other services. The layoffs in manufacturing are likely due to a variety of factors, particularly the influx of cheaper imports from China. These accounted for 31% of total Indonesia imports, and rose by 15.9% y-o-y in 2024 after a 7.5% y-o-y decline in 2023. This was mainly driven by sectors including machinery, base metals, chemicals, plastics/rubber and textiles.

Moreover, the share of informal workers to total employment has risen again. This is a potential concern, because informal workers lack job security, legal protections and access to social benefits. As informal jobs are likely to earn lower wages, they could also reduce overall wage growth and negatively impact household spending.

Another key factor behind weaker consumption is the scarring effects from the pandemic. Growth in some labor-intensive sectors has underperformed, compounding the impact of more intense competition from Chinese imports. While output growth for the overall manufacturing sector returned to slightly above pre-pandemic rates, labor-intensive segments remained weak.

Another shift that is likely weighing on private consumption is the contraction of the middle class population. In August 2024, the statistics office reported that the middle-class population decreased by 9.5 million people between 2019 and 2024. The middle class is an important engine of growth, as it contributes about 40% of total consumption, the second-highest contributor after 42% from the aspiring middle-class segment. The share of total consumption by the middle class dropped to 38.3% in 2024 from 43.4% in 2019.

We maintain our full-year 2025 GDP growth forecast at 4.7% y-o-y (consensus: 4.8%), softening from 5.0% in 2024 and at the lower end of Bank Indonesia’s forecast range of 4.6-5.4%. We expect private consumption to remain subdued in the coming quarters. We see some similarities with 2014-15, with the ongoing layoffs occurring amid a period of low commodity prices. Weak domestic demand could therefore exacerbate external headwinds amid rising global trade uncertainty.

For more details, read our full report here.