Return to Equilibrium

KOMPAS/RADITYA HELABUMI

Residents wearing masks walk carrying shopping bags after shopping at Karang Anyar Market, Sawah Besar, Central Jakarta, Thursday (5/8/2021).

The annual economic growth rate of 7.07 percent recorded in the second quarter of 2021 was the highest since 2005. In the previous quarter, Indonesia\'s economy shrank by 0.74 percent. With this growth in the second quarter, by definition, Indonesia is out of recession.

The rise in the economic growth is the result of a low base-effect because, up to and including the first quarter of 2021, the Indonesian economy was contracting. Stagnant demand also played a key role.

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The phenomenon of high growth in the second quarter also occurred in Indonesia\'s trading partners, such as the United States, China, the nations of the European Union and India. Similar to a spring, if you compress it more, it will produce a greater repulsive force.

The surge in Indonesia\'s economic growth in the second quarter of 2021 was due to "revenge" spending, especially for leisure, such as on hotels and restaurants, travel and the like. The role of the middle class, which according to data from the Finance Ministry in 2019, accounted for 21 percent of the total population, or 57.3 million people, is very important in explaining this surge in growth.

The Purchasing Managers Index (PMI) in the manufacturing sector fell sharply in July 2021 to 40.1 from 53.5 in June, a decline of 25.19 percent.

However, these signs of economic recovery were accompanied by a spike in new daily COVID-19 cases, which led the government to impose level 4 multi-tiered mobility restrictions (PPKM) since the first week of July 2021. The impact of the restrictions is reflected in forward-looking economic indicators. The Purchasing Managers Index (PMI) in the manufacturing sector fell sharply in July 2021 to 40.1 from 53.5 in June, a decline of 25.19 percent. The PMI figure was the lowest in the last 13 months.

The decline occurred because companies were more careful in managing the procurement of raw/auxiliary materials for the production process, anticipating that consumers would tighten their spending. In addition, managers began to register a decline in export orders as a result of the economic slowdown in China, which then affected world supply chains.

KOMPAS/TOTOK WIJAYANTO

A spice trader at the Kramat Jati Main Market, Jakarta, is serving customers, Monday (29/6/2020).

On the demand side, the consumer confidence index (IKK) fell to 80.2 in July from 107.4 last June, a 25.3 percent decline. The decline was due to public pessimism about the economic condition over the next six months, both in terms of business activity and the availability of job opportunities.

Long-term growth path

The question is whether the spike in the new COVID-19 cases will affect the economic recovery so that the process of returning to a long-term growth equilibrium will be hampered or at least delayed. Sectoral growth data shows that momentum is still quite strong despite restrictions on mobility. This has occurred because people feel they need a change of atmosphere and something to renew their enthusiasm.

This sector was the second-worst hit by the pandemic. The other high-growing sectors were services.

The highest growth was in the transportation and warehousing sector, which jumped 25.1 percent. This sector suffered the deepest contraction due to the previous impact of the pandemic. The second-highest growth was booked by the accommodation and food and beverage sector, which rose by 21.57 percent. This sector was the second-worst hit by the pandemic. The other high-growing sectors were services.

The sharp growth in these sectors was partly caused by an increase in expenditure. Expenditure on hotels and restaurants grew 16.29 percent year-on-year in the second quarter. This indicates that prior to the implementation of the level 4 PPKM, demand for leisure was rebounding. The renewed momentum continued in the third quarter of 2021, mainly due to the relaxation of level 4 PPKM in mid-August in response to a significant decline in daily confirmed COVID-19 cases.

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Forward-looking indicators have already showed a return to the positive, optimistic zone. From the production side, the PMI figure rose to 43.7 in August, a 8.98 percent increase in a month. The index was still in the contraction zone, partly because of a slowdown in exports and supply chain disruptions resulting from the disruption of port activities caused by the accumulation of containers and the closure of a major port in China.

The August index value was not far from the expansion zone, and was closer to expansion than the lows recorded in the April to May 2020 period. It is expected that in two months from July 2021, the PMI figure will rise to 50 or even exceed it. Data provided by Apple.inc shows that there was a 20 percent increase in public mobility (driving activity) between July and August.

KOMPAS/RONY ARIYANTO NUGROHO

Traffic atmosphere of visitors to the Puncak area, Bogor Regency, West Java, during the Islamic New Year national holiday, Wednesday (11/8/2021).

Based on the experiences of other countries, there should be no complacency about the declining number of new COVID-19 cases in recent weeks. For example, Vietnam, which was previously considered one of the best in the world at handling COVID-19, is now struggling to suppress the spread of the virus. Anecdotal examples show that the routes to tourist areas such as Puncak and Lembang have been congested on weekends. The odd-even policy has been implemented on the Bogor-Puncak route, and the administration is considering extending it to the Cianjur border.

Level 4 PPKM have succeeded in lowering the seven-day moving average from 50,039 cases on July 18 to 8,057 cases on Sept. 2. The spike in new cases after Idul Fitri was similar the phenomenon of a “broken dam”, causing a resurgence in June and July. Learning from this experience, the government has implemented a gradual relaxation of PPKM as a signal that vigilance must be maintained.

ARI KUNCORO, rector of the University of Indonesia

(This article was translated by Hendarsyah Tarmizi)