The national economy in the second quarter of 2020 contracted 5.32 percent year-on-year (yoy), which in itself is not considered to an indicator of a recession.
By
Agus Sugiarto
·6 minutes read
Kompas
People walk past a sale sign in a department store window in Melbourne\'s central business district on June 3, 2020. - Australia is heading for its first recession in nearly three decades after the economy shrunk in the January-March quarter, with a "far more severe" reading expected in the next three months as the effects of the virus shutdown bite.
The national economy in the second quarter of 2020 contracted 5.32 percent year-on-year (yoy), which in itself is not considered to an indicator of a recession.
The government is still waiting for economic data for the third quarter of 2020, which will be released in early October 2020, to determine whether the country is indeed in a recession or not. If the data shows negative growth again, Indonesia has officially entered a period of economic recession.
Shiskin (1974) argues that the main indicator to determine the status of a country\'s recession is the occurrence of economic contractions measured through the gross domestic product (GDP) in two consecutive quarters. However, in its development, the National Bureau of Economic Research (NBER) in the United States see various other factors besides GDP as leading to economic recession.
We can also see here that there are some other indicators that are often forgotten but can be used as a benchmark to see or predict the potential of economic recession in Indonesia.
This is because the economic structure and model adopted by each country is different, so each country also has different indicators to determine the cause of the recession. We can also see here that there are some other indicators that are often forgotten but can be used as a benchmark to see or predict the potential of economic recession in Indonesia.
Deflation
Our economy has seen deflation for two consecutive months at a rate of 0.10 percent in July and 0.05 percent in August 2020. This deflation indicator shows that macroeconomic conditions are slowing down marked by declining prices of goods and services. We must carefully watch the deflation trend seen in the last two months to ascertain whether it is a precursor of a recession or not.
Various empirical studies show that there is a very close link between deflation and recession, because continuous deflation can lead to a recession, and vice versa. There is already a lot of empirical evidence from some countries that shows that, before an economic recession, a particular country would see deflation first. Malaysia experienced deflation for several months from March to July, before its economy contracted up to 17.1 percent in the first six months of 2020.
Composite Stock Price Index
The Composite Stock Price Index (IHSG) provides a realistic portrayal of how well corporations, which have been the backbone of production and investment, can operate. Pessimism on the part of investors who buy shares on the stock exchange increased when the pandemic was announced, so that some of them had to release stocks that did not have good prospects going forward.
AFP/ROMEO GACAD
A man wearing a facemask amid concerns over the spread of the COVID-19 novel coronavirus, walks past a stock market display board showing movements of the South Korea\'s stock index at a shopping mall in Bangkok on March 15, 2020. - The world markets were sent into meltdown by fears over the coronavirus outbreak that has threatened to plunge the global economy into recession. (Photo by Romeo GACAD / AFP)
At the beginning of 2020, the IHSG figure was still in the 6,300s, then it dropped to the level of the 3,900s and now it is still in 5,200s. It is difficult to predict when the IHSG will return to the 6,300 level or higher for a number of reasons. First, the performance of most corporations during the pandemic will be disrupted due to declining demand, so the profits earned, if any, are also declining.
Second, the decline in profits saw investors forgo dividends on their shareholdings; in fact, some corporations have stated they will not pay out any dividends even if they make a profit.
MSME Bankruptcy
MSMEs contribute about 60 percent to Indonesia\'s GDP every year, so it is undeniable that MSMEs are the backbone of the national economy. As a result of this pandemic, many MSME activities are disrupted, and no small number among them have had to cease activities. A recent survey by the Indonesian Institute of Sciences (LIPI) shows that 94.69 percent of MSMEs saw a decline in sales. It is estimated that 72 percent will close their businesses by December 2020.
This condition is very worrying, given that MSMEs absorb almost 97 percent of the approximately 137 million workers in Indonesia. Unemployment is often used as an indicator of a recession, especially in the current economic crisis. Since the pandemic in Indonesia, the unemployment rate has continued to surge due to the increase in layoffs. According to Kadin, the number of workers affected by layoffs is estimated to increase by 6 million people, while Bappenas estimates the total unemployment to reach 10.7 million people. The increase in the number of unemployed has a multiplying impact on their families, meaning that not only 10 million people are affected or struggle to make ends meet, but the number can reach 20 million or even 30 million considering those who depend on the person being laid off.
Credit restructuring
The decrease in credit disbursement indicates that credit demand is declining and banks are increasingly selective in issuing new loans. Weak economic activity is also reflected in the increasing number of corporate debtors or SMEs that apply for credit restructuring. The increasing demand for credit restructuring is due to the difficulty of liquidity as a result of weak demand, so that large corporations and SMEs can no longer carry out their business activities normally. Currently, the credit restructuring program initiated by the OJK and banks has reached around Rp 857 trillion.
Consumer confidence index
The consumer confidence index (CCC) is an indicator that describes how consumers expect future economic conditions, whether they feel optimistic or pessimistic. Before the pandemic occurred, the index in February 2020 still stood at 117.5 which means it is still in the optimistic zone (> 100). However, the index continued to slump since the pandemic broke out and in July it stood at 86.2, which indicates consumer pessimism about the economic situation.
Both surveys are indications of the future economic prospects that are full of uncertainty, and worry about the potential of a recession is already on the minds of consumers.
Consumer pessimism was in line with the results of the current economic condition index (IKE) survey, which shows a more extreme decline from 105.5 in February to 50.7 in July 2020. Both surveys are indications of the future economic prospects that are full of uncertainty, and worry about the potential of a recession is already on the minds of consumers.
Difficult condition
If, in the end, the Indonesian economy eventually falls into recession in the third quarter of 2020 quarter, we hope that the recession will only occur in one quarter, so that in the fourth quarter of 2020 we are able to recover and grow positively or at least enter the neutral zone or 0 percent. The possibility of a prolonged recession must be prevented as hard as possible with various advanced macroeconomic policies, so that our economy does not lead to a depression or paralysis.
Agus Sugiarto, Advisor, Financial Services Authority
