The pent-up demand in Indonesia has a different character from that in the US and China. In the US, people shop for durable goods, especially gadget and in China there is a more balance between durable goods and service
By
ARI KUNCORO
·6 minutes read
The phenomenon of pent-up demand generally occurs after the economy suffers a crisis and people are returning to normal earlier patterns. People who experience regional quarantine will try to compensate for the time lost during quarantine.
There are three consequences. First, if the production side or supply chain cannot keep pace, high inflation will occur (Philips, 1956; Phelp, 1969). Another possibility is an import boom or inflation plus swelling imports. If the production side is ready, the pent-up demand can become a source of growth (Mayland, 1988).
Inflation and supply chain
China experienced a sharp contraction of 6.8 percent in the first quarter of 2020. The economy then recorded a gradual recovery. For the next three quarters, the country’s economy grew 3.2 percent, 4.9 percent and 6.5 percent, respectively. The new inflation phenomenon was seen in the first quarter of 2021 when China recorded a growth of 18.3 percent.
This occurs because the general public’s demand increases rapidly after holding off on spending. In addition, exports from China as a global manufacturing hub also increased 32.2 percent (yoy) in April 2021 when the world\'s manufacturing supply chain almost came to a virtual halt. This could offset an increase in imports of 43.1 percent as a result of the sharp increase in domestic demand and demand for raw materials / semi-finished products from the manufacturing sector.
Due to these two factors, China has become a source of global economic growth. However, the pressure on the supply chain remains visible. The producer index inflation jumped from 1.7 percent yoy in January to 4.4 percent yoy in March and 6.8 percent yoy in April 2021.
The situation in the United States is different because the supply side has experienced a backward bending labor supply curve (Hanoch, 1965; Rahman, 2013). This occurs due to the provision of a sizeable stimulus check per individual: US$ 1,400 for individuals, heads of households and married couples with certain conditions.
Under normal circumstances, the American people used to have one or two extra jobs to maintain a middle-class lifestyle. For small businesses, such as restaurants or traders, this is a source of labor.
During the pandemic, almost all businesses suffer. As compensation, the US government provides a wage subsidy.
Such a policy managed to boost annual growth to 6.4 percent in the first quarter of 2021. However, it produces a negative effect as some people feel “fulfilled” and no longer need to work. As a result, businesses find it difficult to find additional workers. This has resulted in additional inflationary pressure on the production side, apart from those stemming from increases in raw and material prices.
Part of the financial stimulus was spent on gadgets (electronic devices), such as smart TVs, laptops and the like, which increased the demand for electronic chips, steel, and other materials. As a result, the producer price index increased by 4.2 percent yoy in March 2021, the highest since September 2011. This also resulted an increase in imports. The US trade deficit also hit record $74.4 billion in March.
Demand
The pent-up demand in Indonesia has a different character from that in the US and China. In the US, people shop for durable goods, especially gadgets. Meanwhile in China there is a more balance between durable goods and services, such as travel, culinary delights, and the like.
In Indonesia, the large number of travelers during the annual Idul Fitri mudik (exodus) ban showed the character of the pent-up demand, which is more oriented toward relaxation than the purchase of durable goods. Data from the Transportation Ministry indicated that after the mudik ban ended, there was a surge in passenger transportation by 191.6 percent. This underlines that mudik as a socio, economic and family culture phenomenon. Job allocation, income distribution, and kinship are major factors in mobility (Behrman, 1992; and Haddad et al, 1994).
The mudik is also supported by the consumer confidence index (IKK) published by Bank Indonesia (BI) in April, which rose to 101.5, which means that it has entered an optimistic zone. Last March, the index was at 93.4, within the pessimistic zone. The improvement in the IKK index was mainly driven by the consumer expectations index of 122.6, which reflects future prospects.
However, the index of economic conditions, even though it has experienced improvement, is still at 80.3. This is still quite far from the optimistic zone of 100. The discrepancy shows that the consumers are still conservative even though they are more optimistic. This can be seen from the purchasing index for durable goods, which rose from 80 in March to 84.6 in April. However, it is still quite a distance from the optimistic zone (score above 100). In fact, the potential for spending is quite significant.
Based on the consumers’ expenditure from March to April, there was an increase in the proportion of the consumers’ expenditures to income from 74.4 to 74.5. Meanwhile, savings edged up from 14.7 to 14.8 percent. The increase in savings may be part of preparation for the annual mudik in May.
Purchasing power does not appear to be a problem either, as future expectations are quite optimistic. The expectation index for the next six months, such as the index of income expectation, job availability and business activities, are respectively in the optimistic zone with encouraging scores of 126.7, 117.9 and 123.2.
With this pattern of demand, the growth of Indonesia\'s gross domestic product (GDP) in the first quarter of 2021 experienced a 0.74 percent contraction. It has improved compared to the previous quarter, but the economic leverage is still limited. On the positive side, the impact on inflation is still relatively small.
The purchasing manager index (PMI) for manufacturing reached 54.6 in April, showing a sign of expansion.
Such a condition indicates that the production side is relatively ready. The purchasing manager index (PMI) for manufacturing reached 54.6 in April, showing a sign of expansion . There is no increase in in inflation, such as in the US and China.
The annual inflation rate in April, last year was 1.42 percent. Since July 2020 until April 2021, the annual inflation was still below 1.67 percent. The increase in visitors in shopping centers, such as the Tanah Abang Market and in tourist attractions, in addition to the homecoming phenomenon indicate that behind the low growth figures and inflation, there is a potential for an explosion in the pent-up demand in the next few quarters.
If this can be accompanied with strict health protocols, including regulating the capacity and visiting time at shopping centers, swab and antigen tests, safe transportation, and vaccinations, this potential can be used to take Indonesia to a higher growth path.
ARI KUNCORO, Rector of the University of Indonesia
This article was translated by Hendarsyah Tarmizi.