Vaccines and Economic Recovery
The vaccination will affect economic activities through the expected reintegration of supply and demand that have become separated during the pandemic (decoupling).
Ari Kuncoro
President Joko “Jokowi” Widodo announced recently that Covid-19 vaccines would be free of charge. The vaccination will affect economic activities through the expected reintegration of supply and demand that have become separated during the pandemic (decoupling).
On a global scale, the impact of the vaccine notification can be observed in the oil market, which has been stagnant due to the pandemic. In line with the announcement that industrialized countries have begun to buy vaccines on a large scale, the price of WTI crude oil, which had stood at US$41 per barrel since early September, began to increase significantly to reach $48 per barrel in mid-December.
It is very interesting to observe the impact of the vaccines on Indonesia. However, before that, it might be worthwhile to look at the experiences of other countries. The manufacturing Purchasing Managers’ Index (PMI) can be used as an early indicator. The PMI is forward looking, because it is the anticipation of the procurement manager in preparing the input goods required for future production.
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So far, China and the United Kingdom have begun mass vaccinations. For other countries, the impact is limited to the announcements, because there has been no actual vaccination. Nevertheless, the world PMI figure for July already passed 50, the reading that marks the boundary between contraction and expansion.
In November, the index stood at 53.1 or slightly down from 53.3 in October. The fall occurred due to concerns that the European economy would contract deeply, like in the second quarter of 2020. Amid fears of the second wave of the pandemic, a number of countries, such as the UK, Germany and the Netherlands, have imposed a second regional quarantine because of insufficient hospital capacity.
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The PMI figure above was driven by the increase in the PMI in China, which had slumped to 35.7 in February. Unlike other countries, in China, the lag between the announcement and implementation of vaccination is very short, because the country is also the producer of the vaccine. China\'s PMI recovered quickly, with an interval of only one month. In March, the index drastically climbed back into the expansion zone with a score of 52.
Indonesia also felt the leverage a few months later, with an increase of exports by 2.65 percent in August, compared to July, following a persistent drop in exports since April.
East Java Governor Khofifah Indar Parawansa released the export of sheep from East Java to Brunei Darussalam, Monday (21/12/2020). A total of 2,650 sheep were exported to Brunei during the pandemic via the Juanda Airport cargo terminal.
Economic impact
The impact of the pandemic can be seen from the slowdown in economic growth that occurred since the first quarter of 2020 with growth falling from 5 percent (annually) to 2.97 percent. The slowdown has continued since then. First, the economy suffered its deepest contraction of 5.32 percent year-on-year (yoy) in the second quarter of 2020. After that, there was an improvement in the third quarter, but economic output was still down 3.49 percent yoy.
This growth pattern followed the movement of the PMI numbers. During 2020, the lowest point was recorded in April with a score of 27.5. In June, the PMI rose to 39.1. The announcement of the relaxation of large-scale social restrictions (PSBB) further pushed up the index to 46.9 in July, or a 20 percent increase. Only after the relaxation of the PSSB was fully implemented in July, the index moved into the expansion zone in August with a score of 50.8, or an increase of 8.3 percent, so that the total effect of the relaxation of PSBB on PMI reached 28.3 percent. Interestingly, the effect of the announcement was greater than the effect of its implementation, so it deserves attention.
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The effect of the vaccine announcement in Indonesia can be seen from the movement of the country’s PMI from September to November. However, it must be noted that, in September, the PMI returned to the contraction zone with a score of 47.2 following the announcement of the reimposition of the PSBB policy.
The effect of the declaration began to occur in August with a minus of 6.7 percent. The negative effect lasted until October, as the PMI figure in the month only edged up to 47.8.
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The vaccination program was announced in October. Although the vaccination has not been implemented, the PMI rose to 50.6 in November. Thus, as of November, the effect of the vaccine announcement was only 5.9 percent. However, whether it will affect economic growth in the fourth quarter of 2020 is still difficult to predict, because PMI data for December are not yet available and have not included the announcement of free vaccination.
Simulated Covid-19 vaccination at RSI Jemursari Hospital, Surabaya, Friday (18/12/2020). This simulation is to ensure the readiness of vaccines to the community.
Policy implications
This experience has made the government more careful about the impact of policy announcements in dealing with the increase in new Covid-19 cases after the long holiday at the end of October. It could risk the contraction of the economy, as the PMI position is in the range of 50, making it prone to a negative impact of the notification.
At the same time, a drastic increase in new Covid-19 cases also has the potential to disrupt consumer spending, which accounts for 59 percent of gross domestic product (GDP).
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The consumer confidence index (IKK) issued by Bank Indonesia shows ambiguous consumer perceptions. On the one hand, it is still pessimistic, because the IKK is still below 100, namely at 92. On the other hand, one of the index formations is the consumer expectations index (IEK), which soared to 123.9 in November from the position in October.
The IEK measures consumer expectations of future economic conditions. There are concerns that the negative effect of the pandemic mitigation policy in September will disrupt the momentum of economic recovery.
A bicycle shop in a shopping center in the Cakung area, East Jakarta, Saturday (12/12/2020). Even though the economic condition has not yet recovered as before the Covid-19 pandemic, industry players hope that demand at the end of the year will increase. The momentum of the 2020 Christmas and 2021 New Year celebrations can encourage public consumption.
With such a dilemma, the policy adopted by the government is based on the concept of the median voter theorem, balancing health and the economic recovery. There are no black-and-white restrictions against people travelling out of town, but there are appeals not to travel. In addition, travelers are required to take a polymerase chain reaction (PCR) test or a rapid antigen test.
We hope the people\'s expectations of future economic improvements can be maintained
This compromise is quite reasonable, because a survey conducted by the Transportation Ministry found that 73 percent of respondents would not travel out of town during the long year-end holidays. It seems that the new habit of conducting outdoor recreation by riding a bicycle, exercising in the morning, gardening, etc. is taking root. This can be a substitute for a long-distance vacations if the public health situation is not yet conducive.
Thus, the negative effects of the impact of the announcement of new policies can be minimized. We hope the people\'s expectations of future economic improvements can be maintained. At the same time, the positive effects of the announcement of the free vaccines on public health can be maximized.
ARI KUNCORO, Rector of the University of Indonesia.
