How to Protect Indonesia’s Productivity Momentum
By: Kiki Verico, Ph.D., The writer is an adviser for international trade and industry to the finance minister and senior lecturer at the School of Economics and Business of the University of Indonesia. The views expressed here are his own.
TheJakartaPost – (8/11/2021) Statistics Indonesia (BPS) reported last Friday that economic growth in the third quarter had fallen to 3.51 percent from 7.07 percent year-on-year (yoy) the inflation averaged 1.57 percent. However, these figures confirmed that Indonesia’s economy remained productive despite the devastating impacts of the Delta-fueled COVID-19 wave during half of the third quarter.
The severe mobility restrictions imposed to cope with the Delta variant depressed the hospitality, food, and beverage sectors to a contraction of 0.13 percent in the third quarter (yoy) from a 21.58 percent growth in the second quarter. The Purchasing Manager Index (PMI) dropped from 53.5 in June to 40.1 in July, but rose again to 43.7 in August and 52.2 in September. The Consumer Confidence Index (CCI) fell from 107.4 in June to 80.2 in July and 77.3 in August but rose to 95.5 in September.
The indicators show that business confidence (PMI) picked up slightly faster than the CCI. This trend can also be seen in the slower average Real Sales Index (RSI) of 190.4 in the third quarter of 2021 compared to 194.8 a year earlier.
Household spending recorded the lowest annual growth of 1.03 percent compared to other sectors of gross domestic product (GDP) expenditures. Another indicator also supported this trend. As the island with the highest population density, Java saw an economic growth rate of only 3.03 percent, lower than the national economic growth of 3.51.
Indonesia’s economy did show resilience. Formal economic activities increased by 1.02 percent from August 2020, as shown by the growth of 0.65 percent in the labor-intensive formal manufacturing sector. This reduced the annual open unemployment rate from 7.07 percent in August 2020 to 6.49 percent in August this year.
Other data showed that in the third quarter of the year, the absorption rate of skilled workers increased while that of unskilled ones decreased. Likewise, the open unemployment rate in urban areas decreased more than that in villages.
If the positive trend continues in the fourth quarter, then starting in 2022, Indonesia’s annual economic growth will be higher than the inflation rate. Before the pandemic, or between 2007 and 2019, open unemployment declined each time economic growth was higher than the inflation rate. Even if the inflation rate was higher than economic growth, open unemployment also fell. These figures confirmed that Indonesia had seen a better quality of economic growth since 2007.
Given this pattern, Indonesia’s economy will return to its productivity level. One indicator of this trend in the third quarter that supported this productivity restoration was the manufacturing sector’s growth rate of 3.68 percent, which was higher than the whole economic growth of 3.51 percent. In the third quarter, the manufacturing sector was the highest contributor (21.4 percent) to economic growth, generating 0.75 percentage points out of the national economic growth of 3.51 percent.
If in 2021, economic growth is higher than the inflation rate and this trend continues to 2022, then Indonesia’s economy will be on the right track in terms of productivity. Also encouraging to note: the highest yoy growth of long-term investment in the third quarter was in machinery and equipment at 11.54 percent. This will enable Indonesia to further increase its manufacturing production.
In terms of GDP expenditure, the highest growth sector was net exports, which contributed around 35 percent or 1.23 percentage points out of the 3.51 percent national economic growth. A combination of positive progress in manufacturing and net exports indicates that Indonesia’s economic recovery has benefitted from the global market.
However, it is also a wake-up call as the global economy faces a new challenge amid the global pandemic, called the scaring impact on the worldwide supply side.
The first identified factor is the effect of global economic recovery on the increasing global inflation rate. The second challenge is a global energy crisis that has been escalating since the hike of worldwide energy demand due to the winter season in the up north, which requires more energy to operate their heating system. The third is the decreasing integrated circuit volume, which affects global electronic and automotive production. The fourth factor is the consequence of the lockdown worldwide, which reduces the volume of international mother vessels and containers.
This prolonged disruption in the logistic supply chain has increased the transportation cost of exports and imports. In the end, all these current global disadvantages will increase production costs and the global inflation rate in 2021.
The remarkable recovery in the manufacturing sector, which made it the main economic driver in the third quarter, marked Indonesia’s productivity momentum, and there are at least four conditions that need to be met in maintaining this momentum.
First, it is clear that amid a pandemic, the containment of the virus infection rate is the key to economic growth. Second, in anticipating global economic pressures, Indonesia needs to enhance its domestic consumption resiliency. Simply put, in the short run, this pressure is predicted to rise from the last months of 2021 to the middle of 2022. Then, if we cannot go outside, we must go inside.
Third, persistent efforts in a series of reforms and catching up to technology to support Indonesia’s manufacturing competitiveness. Fourth, achieving the necessary conditions of the excellent quality of infrastructure and institutions.