Overcoming the Threat of Economic Recession

AFP/KENZO TRIBOUILLARD

A pedestrian wears a protective facemask as he walks past a newly hung banner that reads "Coronavirus Global Response" in front of The European Union (EU) Commission building in Brussels, on May 6, 2020. - The EU forecast on May 5, 2020, that the eurozone economy would contract by a staggering 7.7 percent in 2020, warning the wreckage from the coronavirus outbreak could endanger the single currency.

The Covid-19 pandemic has rapidly dragged the world economy into recession. The surge in unemployment and poverty haunt the world, including Indonesia.

Signs of economic recession in Indonesia have become more apparent. The recession will be worse if the Covid-19 pandemic in the country lasts a long time. As a consequence, it will be more difficult to carry out economic recovery programs.

The Covid-19 pandemic has dragged the world economy rapidly toward recession. In fact, the economic recession is looming as almost all economic activities have been disrupted. Layoffs continue, causing a decline in people’s purchasing power and surge in poverty.

Based on a World Bank Report, the global economy this year is forecast to shrink 5.2 percent. The forecast is lower than the initial estimate issued in January. The economic recession could become the deepest recession since World War II. In fact, the economy of developed countries will fall deeper at 7 percent.

Also read : New Hopes and Challenges for Indonesia

Meanwhile, according to the latest data published by Statistics Indonesia (BPS), Indonesia’s economy grew only by 2.97 percent year-on-year (yoy) in the first quarter, 2020 . The Finance Ministry, Bank Indonesia (BI), BPS and the National Development Planning Agency (Bappenas) have projected the country’s economy to record negative growth in the second quarter.

Consumer survey reports published by the central bank recently showed that consumer confidence remained within the pessimistic level (below 100). In June 2020, the Consumer Confidence Index (IKK) was 83.8 and the Current Economic Conditions Index (IKE) was 45.8.

In line with global trends, the weakening of consumer optimism in Indonesia is caused by the implementation of large-scale social restrictions (PSBB) in a number of regions to stop the spread of Covid-19. However, the emergency measures have caused a decline in people’s income, spending and investment.

Also read : Recession and Economic Sustainability

Kompas

Projection of Indonesia\'s economic growth in the second quarter of 2020, according to; Ministry of Finance, Central Bureau of Statistics (BPS) and Ministry of PPN / Bappenas.

The Finance Ministry expects the financial stimulus provided by the government to enable the economy to begin to recover next year. The country’s economy is projected to decline by between 1.6 percent and 1.4 percent in the third quarter, and by between 1 percent and 3.4 percent in the fourth quarter.

According to the Indonesian Chamber of Commerce and Industry (Kadin), one of the causes of the economic contraction is the slow implementation of the economic stimulus. The slow disbursement of the financial stimulus promised by the government would cause economic contraction in the third quarter.

Technically, with the estimated drop in economic growth, Indonesia is getting closer to economic recession. A recession occurs if the economy declines significantly in two consecutive quarters.

Also read : New Normal of the Economy

If the recession hits Indonesia, economic and social problems will increase. A recession, which occurs partly due to a decline in the industrial sector, will cause an increase in unemployment and poverty rates.

According to data published by the Manpower Ministry, as of May 27, 2020 , the number of people who had lost their jobs reached 3.1 million people. The massive layoffs will cause a sharp increase in the unemployment rate, which has been significantly reduced in the past five years. The surge in unemployment will cause an increase in the number of poor people. BPS estimates that there will be additional 3.9 million poor people in 2020.

Be prepared

HERYUNANTO

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A number of countries, such as Australia, Germany, France, Hong Kong and the United States, have entered into an economic recession. Social and physical restrictions have caused Australia to suffer the first recession in 29 years.

Australia\'s economy shrank 3 percent in the first quarter and the negative growth is projected to continue into the second quarter. Meanwhile, Germany, France and Hong Kong suffered negative growth in the fourth quarter of 2019 and the first quarter of 2020.

The US has also identified the impact of the recession as reflected in the surge in unemployment. The US Bureau of Labor Statistics’ report showed that the US unemployment rate rose from 3.5 percent in February 2020 to 13.3 percent in May 2020. The jobless figure was the highest since the World War II.

With the magnitude of potential problems that may arise from economic recession, Indonesia must immediately prepare to face the crisis. The government should accelerate the disbursement of the fiscal stimulus funds, and introduce a fiscal policy that can increase people\'s purchasing power and spending. The quick disbursement of the stimulus funds can help drive economic growth.

The finance minister has raised the government’s budget for the handling of Covoid-19 and economic recovery programs to Rp 695.2 trillion. The funds are allocated for several sectors, namely social protection (Rp 203.9 trillion), financial incentives for micro, small and medium enterprises (MSME) (Rp 123.4 trillion), business incentives (Rp 120.61 trillion), ministries and local governments (Rp 106.1 trillion) , health sector (Rp. 87.5 trillion), and corporate financing (Rp. 53.6 trillion).

Also read : Enforcing New Normal

However, during a Cabinet meeting on June 18, 2020, President Joko Widodo complained that there had been no significant progress in the handling of Covid-19. So far, the use of the budget for Covid-19 mitigation and economic recovery has been ineffective. The disbursement of the budget remains low due to bureaucratic and regulatory constraints.

The disbursement of the financial incentives for MSMEs must be accelerated. MSMEs are among the business sectors severely hit by the pandemic. In fact, the contribution of MSMEs in Indonesia\'s gross domestic product (GDP) reaches more than 50 percent. The sector absorbs a lot of labor and plays an important role in the improvement of the people’s welfare.

In addition to accelerating the disbursement of the budget for handling Covid-19, the government also needs to convince the public to help prevent the spread of the disease so that the number of the new Covid-19 cases could be reduced. The increase in the financial costs in handling Covid-19 will make it more difficult to restore the economy. It will also make the pandemic last for a long time.

Also read : Continually Promoting MSMEs

KOMPAS/PRIYOMBODO

Online motorcycle taxi drivers show customer food orders through an application at Grab Kitchen Tendean, South Jakarta, in late October (29/10/2019). Grab Kitchen is an effort to bring customers closer to their favorite local dishes produced by micro, small and medium enterprises (MSMEs) through online food delivery services. Digital economic growth also helps MSMEs grow and develop.

An opportunity

Even though the threat of recession is imminent, there are still opportunities for Indonesia to avoid recession. Signs of economic recovery are starting to emerge and are expected to bring the economy to the positive territory in the third quarter.

Bank Indonesia’s Consumer Survey in June 2020 indicated consumer optimism for the economy in the next six months along with the easing of Covid-19. Expectations for business activity, income, and availability of employment in the next six months also strengthened. According to Bank Indonesia, the indicators showed that Indonesia will not go into a recession as feared.

The foreign capital inflow into the country is also encouraging. The transaction data from June 22-25 showed that the foreign capital inflow into the government’s bonds reached Rp 4.92 trillion, although there were still net sales of Rp 1.52 trillion in the stock market. In addition, the rupiah is expected to remain stable and the inflation is to remain stable in line with 2020 and 2021 targets.

The implementation of a new normal with health protocols and the improvement of the government’s performances will enable Indonesia to escape from the recession threat.

Meanwhile, Indonesia’s economic status has been upgraded to an upper-middle income country from the lower-middle income status it received in 2003, according to the World Bank’s latest country classification report published on July 1, 2020. The change was based the per capita income recorded in 2019.

Indonesia\'s gross national income per capita rose from $3,840 in 2018 to $4,050 in 2019. The increase in the per capita income indicates that Indonesia has been successful in its economic development programs. The economic improvement is expected to further increase foreign investors’ confidence in investing in Indonesia, rather than in other countries which are also hit by the Covid-19 pandemic.

Although a number of these indicators are too early to be disclosed there are still opportunities that Indonesia can escape the recession. The promising indicators bring hopes of economic recovery in the country. The implementation of a new normal with health protocols and the improvement of the government’s performances will enable Indonesia to escape from the recession threat. (Kompas R and D)