Anticipating the Risk of Stagflation

KOMPAS/RADITYA HELABUMI (RAD)

The atmosphere at Pasar Senen, Jakarta, was not enthusiastic, Wednesday (2/6/2021).

Stagflation threatens the global economy. Even though Indonesia’s risk for stagflation in 2022 is considered low, we still need to be vigilant and anticipate the worst condition in 2023.

Thus far, all parties, including the Finance Ministry, Bank Indonesia and National Planning Agency (Bappenas), still believe that there is little chance for Indonesia to experience a recession or stagflation. The wheels of the economy are still moving relatively fast, supported by, among other things, the export of commodities whose prices have soared on the global market.

The domestic economy is still improving, as reflected in the Real Sales Index (IPR), which continues to grow by 15.4 percent (yoy) and the Purchasing Managers Index (IPM) in manufacturing, which remains expansive and strengthened to the level of 51.3 in July 2022. The performance of the service sector and intermediation financial-services institutions also continues to increase. Likewise, fiscal performance has also improved.

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World research by Oxford Economics shows that Indonesia's risk of stagflation is relatively low compared to the Philippines, China, India, Malaysia, Brazil, Poland and Turkey. A Bloomberg survey puts Indonesia in the 14th rank of 15 Asian countries that have the potential to experience a recession, with a recession risk of only 3 percent.

We appreciate the hard work of the government and the monetary/financial authorities in navigating the domestic economy to remain resilient, with a mix of various policy instruments, amid the challenging global situation that has made many developed countries move unsteadily and many developing countries fall.

A number of circles see the risk of stagflation still threatening Indonesia in 2023.

However, with global real developments and dynamics that continue to deteriorate rapidly, we must remain vigilant, and not become complacent. A number of circles see the risk of stagflation still threatening Indonesia in 2023.

One grave risk that Indonesia faces is if the world's largest economies continue to deteriorate. The United States is technically already in recession, with negative growth for the last two consecutive quarters. China's economic growth has practically stopped due to the Covid-zero policy. The situation in the European Union is no better.

The downturn in major economies puts the risk of a global recession/stagflation in sight. The weakening of the global economy, especially in China, has reduced the demand for export goods from Indonesia, such as commodities and energy, which have been the main pillars of Indonesia's economic resilience until now.

Apart from exports, the locomotive of Indonesia's economic growth, such as investment, is still positive. However, faster interest-rate hikes in the US to curb inflation could hit Indonesia, through an exodus of capital and exchange-rate pressures that could threaten economic and financial stability.

Based on BI data, consumption and investment contributed 84.09 percent of GDP growth in the first quarter (53.65 percent consumption), and exports 23.10 percent.

Equally important, people's purchasing power has also begun to erode as inflation continues to creep up. Based on BI data, consumption and investment contributed 84.09 percent of GDP growth in the first quarter (53.65 percent consumption), and exports 23.10 percent.

In facing a global economic hard landing that could have catastrophic impacts, responses and priorities on policies to reduce the impact of various possible transmission channels are important, including the insistence that fiscal space can be used to encourage people's purchasing power. The government itself has promised that the state budget (APBN) will continue to act as a shock absorber in order to maintain growth momentum and protect vulnerable groups.

(This article was translated by Hyginus Hardoyo)