Purchasing Power Must Be Increased to Avoid Recession
People’s purchasing power needs to be increased in order to prevent Indonesia from falling into a recession.
People’s purchasing power needs to be increased in order to prevent Indonesia from falling into a recession. A sense of security and trust should be established in the community so that the wheels of the economic can turn.
JAKARTA, KOMPAS— Household spending in August-September will be the key to prevent the Indonesian economy from entering a recession. Purchasing power must be increased by increasing people’s confidence in the handling of Covid-19.
In the second quarter of 2020, the Indonesian economy shrank 5.32 percent year-on-year (yoy) after growing 2.97 percent in the first quarter of the year.
Also read: People’s Purchasing Power Continues Decline
The Indonesian economy suffered a contraction in the second quarter as almost all of the drivers of economic growth declined. Household spending, which accounted for 57.85 percent of GDP, fell 5.52 percent yoy.
Finance Minister Sri Mulyani Indrawati said the economic contraction in the second quarter of 2020 was deeper than the government\'s prediction. "Indonesia has not yet fallen into a recession, because this is the first contraction in economic growth," Sri Mulyani said in a virtual press conference held by the Financial System Stability Committee in Jakarta on Wednesday.
Indonesia will fall into a recession if it suffers negative growth for two consecutive quarters. If the economy contracts again in the third quarter of this year, Indonesia will officially fall into a recession.
Based on data from Statistics Indonesia (BPS), the last time Indonesia\'s economy suffered a contraction was in the first quarter of 1999, during which the economy shrank 6.13 percent. As of March 2020, the number of people categorized as poor in Indonesia was 26.42 million people.
A. Prasetyantoko, the rector of Atma Jaya Catholic University, said the country’s economic condition in the second quarter of this year was very bad. People’s purchasing power further weakened as reflected in the decline in household spending. "Purchasing power must be increased by allocating more funds for social protection. The point is that we can’t let purchasing power fall sharply," he said.
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If household spending does not increase, economic performance will weaken and make the contraction even deeper, he said, adding that social assistance can also prevent poverty and unemployment from rising further.
However, Prasetyantoko was optimistic that Indonesia\'s economic recovery would take place relatively quickly given Indonesia\'s low linkages with international trade and foreign investment.
Positive turn
Sri Mulyani said that the government would make extra efforts to ensure positive growth for the rest of 2020 by, among other measures, providing more stimulus packages to maintain the purchasing power of the poor and to help businesses.
The stimulus that will be launched in the second half of 2020 will be an addition to the existing social assistance packages.
The stimulus that will be launched in the second half of 2020 will be an addition to the existing social assistance packages. For example, an additional 15 kilogram of rice will be provided to recipients of the Family Hope Program, Rp 500,000 in cash assistance will be given to holders of Sembako staple food assistance cards, Rp 2.4 million each will be given to 12 million micro and small businesses and Rp 500,000 each will go to 13 million workers with wages of below Rp 5 million per month.
Bank Indonesia Governor Perry Warjiyo said the central bank was accelerating the digitalization of the payment system for social assistance distribution, electronification of local government transactions and implementation of digital economy and finance programs.
Handling of Covid-19
Meanwhile, Hariyadi Sukamdani, the chairman of the Indonesian Employers\' Association (APINDO) said business confidence would rely much on the government’s efforts in coping with Covid-19 transmission. The number of the new Covid-19 cases must be suppressed to create public confidence to spur business activity, he said.
The secretary of the Committee for Handling Covid-19 and National Economic Recovery, Raden Pardede, acknowledged that the handling of Covid-19 should be further improved to encourage the middle class to increase their spending. Amid the Covid-19 pandemic, the middle class gas typically preferred to save rather than spend money. "There are aspects of doubt and caution that make people reluctant to buy," he said.
Money supply data released by Bank Indonesia show that third party funds in banks as of June 2020 grew 7.6 percent yoy. Individual savings, for example, rose 8.5 percent.
"The main program in the second half is to make Indonesia safe and healthy, promoting the confidence of consumers and the business world by making people less pessimistic about Covid-19. The trick is that we have to make sure fund disbursement for health is faster," he said.
In its report titled "Aspiring Indonesia: Expanding the Middle Class" which was released in January 2020, the World Bank said there were around 52 million middle class people in Indonesia. The average expenditure of this group is between Rp 1.2 million and Rp 6 million per month per person (Kompas, 31/1/2020).
However, the allocation of income for emergency funds and savings has not changed.
Vika Anggraeni (25), an employee in Jakarta, said that her expenses in April-June 2020 increased 0.02 percent compared to January-March 2020, partly due to an increase in purchases of various products to meet health protocols and support working from home activities. However, the allocation of income for emergency funds and savings has not changed. "Until the end of this year, I still feel that my personal financial condition is safe. However, if the pandemic continues until 2021, I am worried about my financial condition, "she added.
As stated by BPS head Suhariyanto, the government must make extra efforts to ensure the household spending and investment increase in the third quarter of 2020. These two factors will be the main drivers of economic growth in the next quarter.
Stock market investors anticipated data on negative economic growth in the second quarter of 2020. On Wednesday, the Jakarta Composite Index, the main price index for the Indonesia Stock Market (IDX) rose about 1 percent to close at 5,127.05 at the end of trading despite the fall in the economic growth.
Jasa Utama Kapital\'s analyst, Chris Apriliony, said domestic investors had already anticipated there would be a contraction in the economy in the second quarter. "Another positive sentiment, BPS said, there has been an improvement in economic activities in the third quarter," he said. (KRN/AGE/DIM/JUD)