Taking Advantage of the World Economic Locomotives

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

The International Monetary Fund (IMF) recently revised up its global gross domestic product (GDP) growth forecast. The world economic growth forecast for 2021 and 2022 jumped to 6.4 percent and 4.4 percent, respectively, up from the initial estimate of 5.5 percent and 4.2 percent. Supporting factors are the smooth economic recovery in United States and China and the smooth process of the Covid-19 vaccination program.

The IMF also said China would become the main locomotive of the world economic recovery. China is estimated to contribute one-fifth of the world’s  gross domestic product (GDP) growth in the next five years (Tanzi [2021]). The next contributors will be the US, India, Germany and Japan. Global think tank Brooking Institute and leading newspaper the Financial Times issued recently the Tracking Indexes for the Global Economic Recovery (TIGER), which stated that only the US, China, India, Indonesia and South Korea could exceed the GDP growth levels recorded before the pandemic in 2021.

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Based on IMF calculations, the global GDP is expected to increase by US$28 trillion $122 trillion in the five years through 2026, after falling $2.8 trillion last year due to the pandemic.

The US economy will receive a mega stimulus worth $1.9 trillion, which will include a stimulus check of  $ 1,400 for adult citizens with an income of up to $ 75,000 per year. The stimulus funds will be also used for infrastructure modernization (including passenger trains or AMTRAK) and mass vaccination programs.

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The distribution of the US-style social assistance was hinted by Joe Biden during his campaign in November 2020. Its impact on the world is quite significant because US citizens since January 2021, even before this social assistance policy was approved by Congress, have increased their expenditures on furniture, laptops, clothes, etc, mostly imported  products, worth $ 220 billion (Lynch [2021]). Meanwhile, the domestic impact is shown in the addition of 916,000 jobs in March  2021.

AP PHOTO/PABLO MARTINEZ MONSIVAIS

In this Feb. 27, 2021, photo, President Joe Biden speaks on the economy in the Roosevelt Room of the White House in Washington. Biden took office promising to move quickly to restore and repair America’s relations with the rest of the world. Yet one major nation has yet to see any U.S. effort to improve ties, and that\'s China.

Uncertainty is still high

Despite such an encouraging report,  uncertainty still looms over the global economy. The progress of vaccination is not the same in every country. Developed countries tend to stockpile vaccines on the grounds of national emergencies. The poor countries, which are generally in the southern hemisphere, become the victims. At the same time, in several European countries, the euphoria of vaccination is being marred by the spread of mutations of new coronavirus variants so that a third and even fourth regional quarantine has to be implemented.

Meanwhile India, which is accelerating its vaccination program, is struggling to deal with Covid-19 resurgence. An increase in new daily cases was recorded at 131,787 on April 8, 2021 after the epidemic curve fell for a while (The Hindu, April 8, 2021). The increase occurred due several religious festivals as well as elections in five states.

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This uncertain situation hinders the rapid recovery of the global economy as a whole. The US Brooking Institute calls this phenomenon as a two-track recovery,  which comprise fast-track countries and slow-track countries.

The differences in the characters of the two locomotives of the global economic recovery above can be traced from the latest data issued by Statistics Indonesia (BPS). Overall, Indonesia\'s exports increased by 8.56 percent on an annual basis. China as a manufacturing hub tends not to import finished manufactured goods, but primary commodities, such as coal, palm oil and rubber. The impact of China’s imports is more visible in the increase commodity prices than in export volumes. As of February 2021, the price of palm oil increased by 35.09 percent compared to last year. Meanwhile, the prices of rubber and coal increased by 45.49 percent and 28.24 percent, respectively, on an annual basis.

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KOMPAS/RHAMA PURNA JATI

A farmer taps rubber in his garden on Harapan Island, Sembawa District, Banyuasin Regency, South Sumatra, Monday (12/2/2018). The price of rubber commodities in the first quarter of 2021 has begun to improve at the farm level.

The US, on the other hand, tends to import manufactured products, both finished goods for consumption and semi-finished goods for production process. The US manufacturing indicator Purchasing Managers\' Index (PMI) for March 2021 hit 59.1, the second highest in history. This helps restore the global supply chains. The global PMI figure increased from 53.2 in February 2021 to 54.8 in March 2021. Thus, directly or indirectly, through the world supply chain, it will result an increase in exports of Indonesia\'s manufactured goods.

Indonesia\'s exports of manufactured goods grew 9 percent on an annual basis in February 2021. They mainly comprise steel, precious base metals, and organic base chemicals from agricultural products. Indonesia\'s PMI figure rose sharply from 50.9 (February) to 53.2 in March 2021. This figure is the highest in the last 10 years. When the number of the daily Covid-19 cases increased to 14,517 at the end of January 2021, Indonesia\'s PMI was at 52.2 which means it remains in the expansion zone (above 50). The increase in Indonesia’s PMI was partly due to the implementation of the government’s micro-scale public activity restrictions (PPKM Micro), which was effective in reducing the daily Covid-19 cases and also help restore the supply chain.

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The performance improvement on the production side of the economy above will be sustainable if it is accompanied by a recovery on the demand side. BPS’ latest data on household consumption has not been published. However, Bank Indonesia has launched a Consumer Confidence Index (CCI). The CCI has continued to improve since it dropped significantly to 84.9 in January 2021 due to a drastic increase in daily Covid-19 cases.

The implementation of the PPKM policy played an important role in improving community expectations. The CCI increased slightly to 85.8 in February 2021 and rose sharply to 93.4 in March 2021. Although the figure is still in the pessimistic zone (below 100), it is already approaching the position in December 2020, before the long week-ends which had resulted in the increase in new Covid-19 cases.

Learning from this experience and also from India, the government has decided to ban the annual Idul Fitri mudik (exodus) next month to suppress the transmission of Covid-19. The ban is also expected to restore the circular flow of domestic income in demand side (IKK) and the production side of the economy (PMI). The  PMI and IKK indicators have showed an improvement after the implementation of the PPKM Micro.  With such an improvement, Indonesia can take the advantage of the recovery of the two world economic locomotives, namely the US and China.

ARI KUNCORO, Rector of the University of Indonesia.

This article was translated by Hendarsyah Tarmizi.