Recession and Economic Turnaround
Besides making people anxious about their livelihood, re-cession has also turned people to be more creative, which can be done through informal business activities.
Customers gather at a street stall in Jakarta on November 5, 2020, as Indonesia tumbles into first recession since the Asian financial crisis.
Recession can be smelled from the kitchen. This is a simplistic expression, but it refreshes our memory on the latest recession that this country had, in which food booths and stalls flourished in various parts of Jakarta at night in 1997-1998.
People need to survive, and they could do that by selling foods at booths and stalls in the street. It happens during the COVID-19 pandemic but through a different means. Rather, people are selling foods via social media.
The implementation of large-scale social restrictions has forced food booths and stalls in the street to transform into online booths and stalls. Besides making people anxious about their livelihood, re-cession has also turned people to be more creative, which can be done through informal business activities.
Early signs of economic turnaround
Data from Statistics Indonesia (BPS) proves this anecdote. As of August 2020, the share of employees decreased from 71.04 percent to 63.85 percent of the labor force. Meanwhile, the share of informal workers increased to 60.47 percent in August this year, from 55.88 percent in August last year be-cause of the COVID-19 pandemic.
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Besides that, the BPS also announced a 3.49 percent year-on-year (yoy) economic contraction in the third quarter. We are in recession. But there is still hope because the contraction in the third quarter is smaller than the previous quarter at 5.32 percent yoy.
It means that the economy has turned around. The turnaround is observable in all components of the gross domestic product (GDP). Government spending, which is dominated by the social safety net, grew by 9.76 percent yoy, a leap from the second quarter, which recorded a contraction of 6.9 percent yoy.
We should appreciate the government’s effort. I have repeatedly said that it is important to cushion the economy through social safety net programs such as cash transfers.
As a result, the government’s counter cyclical spending contributed 0.72 percentage points to the economic growth rate. Without fiscal stimulus, economic contraction would be deeper. We should appreciate the government’s effort. I have repeatedly said that it is important to cushion the economy through social safety net programs such as cash transfers. The policy has proven itself as house-hold spending begins to improve.
How about investment? Unfortunately, although contraction in investment has slowed down, major investment activities in machineries and equipment still experienced a deep contraction. Production expansion is still sluggish. As I mentioned previously, the supply side will not move without support from the demand side. Monetary policy of cutting the rates will not be effective if the demand side remains sluggish.
Biden factor
How about our prospects of getting out of the recession? When can we exit the recession? What is the role of external factors in economic recovery, particularly after the victory of Joe Biden in the US presidential election? To answer these questions, we should examine a few things.
Lee Hsien Yang, center left, the estranged brother of Singapore Prime Minister Lee Hsien Loong, wears a face mask while talking to people at the Chong Pang area during a campaign walkabout for the opposition Progress Singapore Party in Singapore on July 5, 2020. Singaporeans go to the polls on July 10 in Southeast Asia\'s first election since the coronavirus pandemic began, with the health crisis and an economic recession expected to bolster Prime Minister Lee\'s party and extend its unbroken rule.
First, the global economic situation including commodities and energy prices have improved but not returned to the pre-pandemic level. United States-China strained relations will not end following Biden’s victory. The issues between both countries are larger than just trade. Their strained relations are driven by a growing rivalry at the global stage.
Regarding this issue, I predict that both the Democrats and the Republicans will support the current US position in its rivalry with China. Trump was just the trigger, and he just articulated the deep wounds felt by the US society toward China. Therefore, we should prepare ourselves for a long but subtle rivalry between these economic giants – not in the form of trade war. The implication is we should become more reliant on our domestic economy.
Recovery starts from the first quarter of 2021
Second, how fast will the domestic economy recover? My experiment on BPS’ inventory data – which should be taken with a grain of salt due to issues in data accuracy – shows that inventory was pilling up and increased sharply during the second quarter due to weaker demand, which was caused by the implementation of large-scale social restrictions.
Read also: Waiting for the ”Bidenomics” Breakthrough
The amount of inventory, however, began to fall in the third quarter. It is because of improvements in demand and adjustments in production. Although the increase in demand is still limited, it has ex-perienced a turnaround. This experiment is consistent with household spending data.
My quantitative estimate shows that when businesses are able to anticipate the economic condi-tions, changes in inventory will be low. Changes in inventory will start to increase two quarters after improvement in demand. Hence, changes in inventory will be positive again during the first quarter of 2021.
In other words, improvement in demand will increase production utilization. Hence, companies will add investment and maintain their inventory at a certain level to anticipate additional demand. At that time, the economy and inventory will improve due to the accelerator effect as hypothesized by Blinder and Maccini (1991).
This improvement suggests that production and investment have started to recover.
We should also look at imports of capital goods and intermediary input, which started to improve in September. This improvement suggests that production and investment have started to recover. There will be a lag of six months. Hence, the economy will record positive growth in the first quarter of 2021.
If we assume that a second wave does not occur, Indonesia will have a swoosh shape recovery like a Nike logo – hitting the nadir in the second quarter and gradually recover.
Third, how is current household spending? An estimate made by the Office of the Chief Economist of Bank Mandiri shows that the pandemic hit all income segments. Permanent employees have experienced a minimal impact, but informal workers and business owners have had the sharpest drop in income, respectively to 60 percent and 80 percent of their normal income.
Lower-middle class (informal workers) have suffered the most. That is why the government’s deci-sion to provide a social safety net like cash transfers is the right decision. Interestingly, lower-middle class’ consumption spending has shown an improvement, currently at 83 percent of their normal spending before the pandemic.
Ironically, the consumption spending of the high-income class is just 71 percent of their normal consumption. What does this data mean? In percentage, the lower-middle class outspends the high-in-come class. As for the high-income class, they are still reluctant to spend their income. Why? Perhaps their consumption activities require high mobility. As long as the pandemic is still out of con-trol, they will cut their consumption. Unfortunately, the country’s household spending is dominated by consumption of the high-income class.
There is another interesting observation over the high income class’ consumption behavior. Besides saving their income – possibly to anticipate future economic conditions, they also spend their income on hobbies. Their spending on hobbies is 10 percent above their spending before the pandemic. It explains why there is a boom in bicycle, indoor plant and fishkeeping sales recently. People need activities for when they are cooped up at home.
In other words, people prefer private activities to reduce the possibility of coronavirus infections.
Their recreation behaviour has also changed. They prefer to travel with private vehicles and stay in private villas or hotels that are separated from the masses. In other words, people prefer private activities to reduce the possibility of coronavirus infections. From my observation, businesses can utilize their creativity to adjust with the change in consumption behaviour.
Fourth, during the pandemic health protocols should be implemented. It is important to maintain physical distancing at restaurants, shopping malls, offices, and factories, which means they cannot operate at 100 percent capacity. As a result, we cannot reach the economies of scale. If companies cannot achieve economies of scale, some of them cannot even reach their break-even point. As a result, these companies will suffer from losses.
Australian Prime Minister Scott Morrison (Top-R) is seen on a screen attending a videoconference with G20 leaders to discuss the COVID-19 coronavirus, at the Parliament House in Canberra on March 26, 2020. - Leaders of the G20 major economies are holding an online summit on March 26, in a bid to fend off a coronavirus-triggered recession, after criticism the group has been slow to address the crisis.
A Bank Mandiri study shows that the break even point for restaurants is 67 percent, air transportation is 68 to 75 percent, and the cement industry is 53 percent. Retail is likely to recover faster be-cause its break-even point is at 32 percent for fast-moving consumer goods and 42 percent for others. If production volume is still low, there is no point to add investment. Consequently, private in-vestment will not increase sharply in 2021.
Health protocol until 2022
Five, the path to economic recovery is long. Why? We need vaccines to resolve this pandemic. Nev-ertheless, the government should prepare for another scenario for when a vaccine is still unavailable or takes longer than expected to be ready.
Let us look at the math. If a vaccine is ready by January 2021, and the government successfully dis-tributes it to 102 million people in 2021, as stated by the coordinating economic minister, the government should vaccinate 280,000 people per day.
Can we do that? If we can, it will take a long time to complete. The government should have the necessary resources to complete this gargantuan task. It will be more complicated if we need to vaccinate the people twice.
Raden Pardede, the executive secretary for the COVID-19 and national economic recovery task force, said a comprehensive plan was needed to distribute the vaccine, including using boxes with stable temperature.
Read also: Awaiting a New Direction in Pandemic Policy
Do we have the logistics capacity to vaccinate 170 million Indonesian citizens? Under the current situation, it is highly possible that health protocols will remain in place until 2022. It means that the economy will return to normal in 2022. As long as a vaccine is not available, another alternative should be prepared. Testing, tracking, and isolation should be implemented to prevent the spread of coronavirus infection. If the pandemic spreads, economic recovery will follow a W-pattern.
Inequality during COVID-19
Six, if external conditions are not favorable, then private investment will remain sluggish. Hence, fiscal stimulus programs, particularly in the health social safety net and support for micro, small and medium enterprises (MSMEs), should continue in 2021. The design and data of social safety net pro-grams, as well as its allocation and absorption for economic recovery, should be improved.
The upper-middle class can survive this crisis because they have savings and access to dig-ital technology.
Asides from that, another issue that must be tackled is growing inequalities during the COVID-19 pandemic. The upper-middle class can survive this crisis because they have savings and access to dig-ital technology.
They can survive by undergoing digital transformation. However, access to digital technology is costly and not inclusive. Hence, there is a risk that the welfare of the lower-middle class drops during the pandemic. After the pandemic, we may end up with worse income inequality. To anticipate this event from happening, the government’s fiscal policy should be designed to improve access for health care, education, and basic needs, including gender inequality. Limited access to digital tech-nology could be resolved by providing digital infrastructure for the lower-middle class.
Muhammad Chatib Basri
A recession will make us feel anxious. It will remind us about the kitchen anecdote as well as an in-crease in informality. We are in a recession, but this is not about definitions. What we need is a pol-icy to mitigate the impacts. The economy will not recover without mitigating the pandemic. The economy is in a turnaround now, but the job is still not done, yet. There are a lot of things that should be improved. We cannot close our eyes while quoting Walt Disney, “I’ve heard there’s going to be a recession. I’ve decided not to participate”. Disney sounds great, but we know that it is just a fantasy.
Muhammad Chatib Basri, Lecturer at the Faculty of Economics and Business, University of Indonesia.
