So far, the consensus on global-economic projections for the next few years is stagflation or an era in which economic growth is low, while inflation is high.
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Uncertainty is the biggest enemy of planning, while economics is a matter of projections and strategic calculations that are passed down in the budget. Day-by-day, economic projections are becoming more uncertain, so that imagination about the future based on currently available data is needed. As a result, planning becomes dialectic between vision (ideals) and reality that can quickly change according to changing situations.
Such an approach is known as scenario-based planning. Since the 1970s, the world’s major oil-and-gas company Royal Dutch Shell has developed this approach in coping with uncertainty in oil prices due to political conflicts in the Middle East region and the era of hyper-inflation. Apparently, this approach is very relevant to recent developments at a time of heightened uncertainty.
Stagflation has become the baseline scenario or the most-likely situation. In some countries, a recession has become the worst-case scenario that may occur.
So far, the consensus on global-economic projections for the next few years is stagflation or an era in which economic growth is low, while inflation is high. As a consequence, the level of welfare will decrease. Stagflation has become the baseline scenario or the most-likely situation. In some countries, a recession has become the worst-case scenario that may occur.
The global economy can avoid stagflation, if there is a supply-side transformation, such as efficiency of production factors and improvement of logistics systems. Unfortunately, this aspect has, practically, continued to worsen due to the trade war and the Covid-19 pandemic, and is now exacerbated by the Ukraine crisis. In other words, the global best-case scenario is almost impossible.
What is the scenario for the domestic economy in the midst of global uncertainty? Are we able to create a best-case scenario?
The Asian Development Bank (ADB) has just published its Supplement report in the July 2022 edition of the Asian Development Outlook. The report revised down the growth of the Asian region from 5.2 percent in April to 4.5 percent due to the global slowdown. Meanwhile, the growth of East Asia was revised from 4.7 percent to 3.8 percent due to the slowdown in China's economy, which was projected to grow only 4 percent this year. Growth in the South Asia region was also revised from 7 percent to 6.5 percent.
Strong domestic demand and the increase in exports are cited as the main factors in improving Indonesia's economic performance.
Global stagflation has dragged down the performance of economic growth in almost all of Asia. Even so, the economic-growth projection of the Southeast Asian region was increased from the previous 4.9 percent to 5 percent. The ADB's projection of Indonesia's economic growth was also increased from the original estimate of 5 percent to 5.2 percent. Strong domestic demand and the increase in exports are cited as the main factors in improving Indonesia's economic performance.
The recovery of post-pandemic economic activities has resulted in job openings, which have led to aggregate increases in people’s income. The increase in people’s incomes has contributed to an increase in the demand for goods and services, which boosts optimism in the business sector. The optimism in the business world is indicated by an increase in private-sector credit that encourages investment activities.
In addition to being driven by improvement in domestic demand, the increase in economic-growth projections is also supported by the increase in exports. Export revenues increased in line with the surge in commodity prices, such as coal, palm oil and nickel. The increase in oil prices also has implications for the swelling of subsidies for gasoline, electricity and gas, but so far the increase in fiscal revenues has been greater. Even so, the question is whether the increase in state revenues will be used to finance subsidies or be diverted to more productive allocations.
Regarding the impact of increasing prices, almost all countries around the world are unable to avoid it. The inflation forecast for the Southeast Asia region was raised from 3.7 percent to 4.7 percent. Indonesia's inflation, which was originally estimated at 3.7 percent, was projected to increase to 4 percent.
That is why, even though inflation in June had reached 4.3 percent, Bank Indonesia maintained its benchmark interest rate at 3.5 percent.
The problem is, if inflation continues to stay high and interest rates start to increase, economic growth will be eroded. One of the keys to sustaining growth is to manage a monetary policy that is pro-growth and at the same time pro-stability. That is why, even though inflation in June had reached 4.3 percent, Bank Indonesia maintained its benchmark interest rate at 3.5 percent.
Inflation in June was driven more by volatility in food prices, which tended to increase, while core inflation and prices influenced by the government remained relatively under control.
The situation is similar to the United States and other developed countries where the central bank's policy response has been judged to be too late by some experts. However, other experts argue that this time, the inflation is not caused by excess liquidity, but is rather due to production inefficiency. The global situation is indeed worrying.
The war does not benefit any country. The future is at stake, with so much uncertainty. We are lucky because the domestic economy is not under the same pressure as experienced by many other countries. However, if this uncertain situation is not resolved soon, there is no guarantee that our situation will be safe. A bad scenario could occur.
In such a situation, monetary and fiscal policies must be well coordinated so that an increase in interest rates, although unavoidable, will not sacrifice growth. Likewise, fiscal policy must be more flexible while still being oriented toward increasing domestic productivity. The response to uncertainty is flexibility in planning. For that, a strong imagination about the future, or what is known as a what-if scenario, is needed.
A. PRASETYANTOKO,Rector, Atma Jaya Catholic University.
(This article was translated by Hendarsyah Tarmizi)