Speed of Recovery

Several international institutions, such as the Organization for Economic Cooperation and Development, the International Monetary Fund and the World Bank have lowered their forecast on global economic growth.

KOMPAS/AGUS SUSANTO

Ari Kuncoro

Several international institutions, such as the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF) and the World Bank (WB) have lowered their forecast on global economic growth.

In its latest publication, the OECD also released the data underlying its economic growth forecast. The data can be used in a variety of simple calculations. Using the growth convergence model of Barro and Sala-i-Martin (1990), a rough estimate of the coefficient of the speed of recovery, i.e. the time it takes for the economy to return to long-term growth (steady state), can be calculated.

Also read : Three Phases to Recovery

This can be done by comparing the contraction forecast for 2020 with average long-term growth between 2012 and 2019. The time needed is a range of the window of opportunity.

As growth trajectories can change, the process of restoring balance can be faster or slower; for example, if change occurs in public expectation, policies, or technological developments such as vaccine and drug development.

Speed of recovery

In general, the global economy will lose 7.85 percent output in 2020 and record positive growth of 2.75 percent in 2021. If the global economy only grew at a steady state of 3.28 percent per annum as recorded between 2012 and 2019, it can take two years to restore global growth to long-term balance.

Meanwhile, OECD countries\' gross domestic product (GDP) will shrink by 9.29 percent this year and grow only 2.24 percent next year. Using the same method, it will take them approximately 3.45 years to return to a long-term growth path.

Also read : Economy in Post-Pandemic Era

The countries with the sharpest contractions happen to be neighbors France, Spain and Italy, each forecast with negative growth of about 14 percent. These countries are expected to make up their lost output in 2020 in four or more years.

In 2021, only two countries – China and India – are forecast to record positive growth. Although China’s economy shrank by 6.8 percent in the first quarter of 2020, it is forecast to record positive growth in the next two quarters, so the country’s economy will shrink by only 3.67 percent for 2020. As for India, its growth is expected to skyrocket to 8.07 percent in 2021, which will enable it to overcome negative growth of 7.28 percent in 2020.

AP / EUGENE HOSHIKO

A man walks past an electronic stock board showing Japan\'s Nikkei 225 index at a securities firm in Tokyo Friday, May 22, 2020. Shares slipped in Asia on Friday as tensions flared between the U.S. and China and as more job losses compounded the economic fallout from the coronavirus pandemic.

Policy sequencing

Calculations using the OECD data show that Indonesia, without extraordinary effort, can return to its 5 percent growth path in 1.23 years from 2020, or in the first quarter of 2022. This may be a bit late because yb that time, other countries in Asia, such as China and India, will already be competing to control the global supply chain that is currently in a vacuum.

Indonesia should be able to make an early start in the third and fourth quarters of this year. For this reason, crisis management needs not just the design of important policies, but also the ordered sequencing of policies to guide the way to positive expectations.

However, concerns still prevail that Indonesia will fall into the low-level equilibrium trap. The OECD forecasts negative growth of 3.9 percent for Indonesia, while the World Bank forecasts 3.5 percent negative growth if the large-scale social restrictions (PSBB) last four or more months. Indonesia has not reached the appropriate value in some exogenous parameters for positive growth.

Also read: Coronavirus and Economic Resilience

The consumer confidence index remains at 77.8, well below the optimistic level. The Purchasing Manager’s Index (PMI) has improved. but the indicator is still below 50 in the pessimistic zone.

Indonesia’s PMI increased significantly from 28.6 in May to 39.1 in June, indicating light at the end of the tunnel. To boost optimism among the public and businesses, concrete actions to balance public health and restore the economy are needed, especially at the regional level.

KOMPAS/LASTI KURNIA

Trucks park besides shipping containers at Operation Terminal 3, Tanjung Priok Port, Jakarta, Thursday (20/2/2020). Statistics Indonesia (BPS) noted the value of non-oil exports and imports to and from China decreased in January 2020, but said the decline was not entirely due to the coronavirus.

With global imports and exports almost at a virtual halt, the exchange rate can be used as an indicator to determine whether macroeconomic conditions are conducive. In accordance with the dynamic mathematical formula developed by Dornbusch (1976), some macroeconomic variables can be used initially as an economic barometer. The rupiah exchange rate depreciated in March 2020 by 18 percent from Rp 14,500 per US dollar to Rp 16,800 per US dollar in a single month due to the outflow of foreign funds, which increased sharply as global investors moved to safe haven assets over concerns about the negative impacts of Covid-19 on the Indonesian economy.

The sequencing of the government’s pandemic response policies has attracted positive attention from global investors, which is attributable to the improved exchange rate. The return of foreign portfolio investments has also caused the rupiah to strengthen to the pre-pandemic rate of Rp 14,000 per US dollar. Indeed, relying solely on capital inflows s not ideal. However, as in the sport of sailing, a headwind can help the economy to recover. New winds are also expected to come from several factory relocations from the United States to the northern coast of Central Java. This indicates that Indonesia remains an attractive destination for foreign direct investment.

Also read : Recession and Economic Sustainability

The policy sequencing that started with the declaration of Covid-19 as a pandemic, followed by the provision of social protection for the poor and vulnerable groups, protection of micro, small and medium enterprises (MSMEs), loan repayment relaxation, fiscal deficit relaxation, and regulations to supervise economic rescue packages has been deemed appropriate. The latest development is Bank Indonesia’s pledge to pay the interest on a majority of government securities.

The third quarter of 2020 will be a critical starting point for utilizing headwinds. Like all policy design and sequencing, success will ultimately be determined by implementation. The government must also increase budget disbursements at some ministries that are still too low. The goal is to elevate the growth trajectory, directly through the multiplier effect, and indirectly through changes in public expectations and policy credibility (Drazen and Masson, 1994). This change in the balance towards more positive growth will save lives and minimize recession.

ARI KUNCORO, Rector, University of Indonesia.