Muhamad Chatib Basri: Recession and Economic Reversal
Nino Eka Putra ~ PR of FEB UI
DEPOK – Wednesday (11/11/2020),
Muhamad Chatib Basri, Lecturer at the Faculty of Economics and Business, Universitas Indonesia, released his article which was published in Kompas Daily, in the Opinion rubric, entitled “Economic Recession and Reversal”. The following is the writing.
“Recession and Economic Reversal”
Recession is at the door. Of course, this is too simplistic. However, our closest memory to the economic recession in this country is perhaps that of the tent stalls that mushroomed at night in various parts of Jakarta during 1997-1998.
People have to survive, one of which is by opening a tent stall. Sell food. A similar picture, we are encountering today, when the Covid-19 pandemic hit the economy. We see how social media is filled with offers from food vendors. Many, many “kitchens” appeared.
Physical restrictions have forced tent stalls to turn into online stalls. The service and product is the same: offering food. Recession, in addition to creating anxiety, also spurs creativity. One of them is through informal businesses, such as informal activities.
The economic reversal is beginning
The Central Bureau of Statistics (BPS) confirmed this anecdotal evidence: as of August 2020, the percentage of full-time employees fell from 71.04 percent to 63.85 percent of the total working population. Meanwhile, informal workers increased to 60.47 percent in August 2020 from 55.88 percent in August last year (year-on-year) due to the Covid-19 pandemic.
Not only that, last week, BPS announced: Indonesia’s economy contracted 3.49 percent year-on-year in the third quarter of 2020. We are entering into a recession. However, there is hope there: the contraction in the third quarter of 2020 was smaller than the contraction in the second quarter of 2020 which was 5.32 percent.
This means that a turn around has started to happen. Almost all components of the gross domestic product (GDP) in terms of expenditure have improved. Government spending, which was dominated by stimuli for social protection, grew 9.76 percent, a jump compared to the second quarter of minus 6.9 percent.
As a result, government consumption is able to be counter-cyclical and contribute positively by 0.72 percent to economic growth. We can see that without a fiscal stimulus, the economic contraction will be much deeper. I think we need to appreciate this. I have repeatedly conveyed: how important it is to encourage demand through social programs, such as Direct Cash Assistance (BLT). Now it is proven by starting to improve household consumption.
How about investing? Unfortunately, although the contraction in total investment started to slow down, major investments, such as buildings, machinery and equipment experienced a deeper contraction. Production expansion is still very slow. As I have previously said, the production side will not move until demand is pushed first. Monetary policy by lowering interest rates will not be effective if demand is still weak.
The Biden factor
With that in mind, what are our prospects for getting out of recession? When do we get out of recession? What is the external role in economic recovery, especially with the election of Joe Biden as the 46th president of the United States? In order to answer these questions, we must pay attention to several things.
First, the global economic situation, including commodity and energy prices, which have begun to improve, have not fully returned. My guess is that the tension between the US and China will not end soon with the election of Joe Biden. The Sino-US issue is more than just a trade issue. This is a tension triggered by the rivalry of the two giants of the world economy.
On this issue, I suspect that both Republicans and Democrats will support the US position on the rivalry between the US and China. Trump is only a trigger, he is able to articulate the old wounds that have been stored inside. Therefore, we must remain prepared for a long tension, even though it may not be in the form of an open trade war. The implication, meanwhile, is that we must rely on the domestic economy.
Recovery starting 1st quarter-2021
Second, then how fast will the domestic economy recover? My experiments with BPS stock change data show something interesting. I am aware that stock change data must be interpreted with extreme caution. There is a problem in its accuracy. BPS data shows: stocks accumulated and increased sharply in the second quarter of 2020 due to unexpectedly weakening demand due to the implementation of large-scale social restrictions / PSBB (demand shock).
However, the stockpile began to decline in the third quarter of 2020. The reason: demand began to increase and the business world began to adjust production. Meaning: demand, although limited, has indeed started to increase. This is consistent with household consumption data.
My quantitative calculation shows: if a company can anticipate the economic situation, stock changes will indeed be relatively low when demand is weak. However, it started to pick up two quarters after that when demand started to improve. With this calculation, there is a possibility that stocks will rise again in the first quarter of 2021.
Simply put: increasing demand will make use of increased production capacity. The implication: companies must increase investment and keep stocks at a certain level in anticipation of additional demand. Therefore, when the economy increases again, stocks will also increase (accelerator effect) in line with economic improvements, such as the hypothesis of Blinder and Maccini (1991).
We also see that imports of capital goods and raw materials began to increase in September 2020. This means that the production and investment process is starting. The gap is about six months. The implication: there is a chance that Indonesia’s economy will grow positively or come out of recession in the first quarter of 2021.
If we assume that there is no second wave of the pandemic, there is hope that the recovery will take the form of a swoosh shape (like the Nike shoe logo): bottoming out in the second quarter of 2020, after which it gradually improves.
Third, what is the household consumption pattern? Calculations made by the Office of the Chief Economist at Bank Mandiri show that the pandemic has indeed hit all income groups. Permanent workers were the least affected, but informal and self-employed workers experienced a more sharp decline in income, dropping to 60 percent and 80 percent respectively from normal conditions.
We can see that the lower middle class (informal workers) have been hit the hardest. That is why the government’s move to provide social assistance, such as BLT, is the right step. Interestingly, the study also shows that the value of spending of low-income groups has begun to increase even though it is still at the level of 83 percent of normal conditions.
Ironically, the spending value of high-income groups is only 71 percent of its normal condition. What does it mean? Those who shop are the lower middle class. Upper middle group? Still not shopping. Why? Maybe because their activities require high mobility. As long as their health condition has not been resolved, they reduce their spending. Unfortunately, household consumption is dominated by upper middle class spending.
In addition, there is something interesting about the behavior of the upper middle class: in addition to their tendency to save – perhaps anticipating future economic conditions – they also change their spending on hobby activities (hobbies). Shopping for hobbies is even 10 percent above normal pre-Covid-19 conditions. This helps explain the urban phenomenon why the purchase of bicycles, ornamental plants, ornamental fish is on the rise lately. People need some activity while staying at home.
Tourism patterns have also changed. People tend to choose to travel by private vehicle and stay in private or detached villas or inns. In essence, activities tend to be private to avoid transmission. I see that the business world with its creativity and innovation can actually take advantage of the opportunities that arise from this change in behavior.
Fourth, as long as a pandemic occurs, health protocols must be implemented. To maintain physical distance, restaurants, malls, offices, factories cannot operate 100 percent. As a result, economies of scale are difficult to achieve. If economies of scale are not achieved, the company will not be able to meet its break even point. With this the company will suffer losses.
A Bank Mandiri study shows that the break-even point for restaurants is reached if the volume reaches about 67 percent, air transport is 68-75 percent, the cement industry is around 53 percent. Retail will probably recover faster because the break-even point is around 32 percent for FMCG and 42 percent for non-FMCG. If volume is still low, why increase investment? The implication is that private investment is unlikely to increase sharply in 2021.
Health protocols until 2022
Fifth, the road to economic recovery still has a long way to go. Why? We do hope that a vaccine will help solve this pandemic problem. However, the government needs to be prepared with other scenarios if the vaccine is not successful or it takes a very long time.
Look at the math: if a vaccine is available in January 2021, then it will be distributed to 102 million Indonesians throughout 2021, as stated by the Coordinating Minister for the Economy, every day the government must vaccinate nearly 280,000 people.
Can we? If they are able, it will take a long time to do it. The government must have large resources to administer vaccinations. Not to mention if the vaccine has to be done twice.
Executive Secretary of the Committee for Handling Covid-19 and National Economic Recovery (KPPEN) Raden Pardede said a mature plan was needed for vaccine distribution, including the use of boxes with certain and stable temperatures.
Will all the logistics be enough for the future 170 million people of Indonesia? With this condition, it is not impossible that the new health protocol can be fully released in 2022. This means that the new economy will return to normal in 2022. As long as the vaccine is not yet available, other alternatives must be carried out, tests, tracing and isolation must be carried out to prevent a pandemic. spread. If the pandemic breaks out again, the pattern of economic recovery will take the shape of a W.
Post-Covid-19 inequality
Sixth, if external conditions are not yet supportive, private investment is still slow, then the fiscal stimulus, especially for health, social protection, and MSME assistance must be continued in 2021. Social protection design and data as well as budget allocation and absorption for economic recovery must be continuously improved.
Apart from that, one thing that is very important to pay attention to is the risk of increasing income inequality after Covid-19. The upper middle class may be able to get out of this crisis. They have savings, they have digital access.
Those who can survive are those who can carry out digital transformation, while digital access is neither cheap nor even. On the other hand, the welfare of the lower middle class is at risk of continuing to decline. Therefore, post-pandemic conditions will be marked by the risk of increasing income inequality. That is why, from the start, the design of fiscal policies must be directed at improving access to health, education and basic needs, including overcoming gender disparities. Limitations of digital access, for example, must be overcome by providing digital infrastructure for the lower middle class.
Recession may be worrying. He may have memories of the kitchen, of the rise of the informal sector. We are entering a recession. However, our problem is not a definition. Our problem is policy mitigation. The economy will not recover without tackling the pandemic. The economic reversal is starting to happen, but the work is not over. Many things need to be improved. We can’t close our eyes while quoting Walt Disney, “I’ve heard there’s going to be a recession. I’ve decided not to participate “. Disney may sound fun, but we know: it’s a fantasy world. (hjtp)
Source: Kompas Daily. Edition: Wednesday, 11 November 2020. Opinion Rubric. Page 6.