Back to Equilibrium
By: Prof. Ari Kuncoro, Ph.D. Rector of Universitas Indonesia
KOMPAS – (7/9/2021)
The annual economic growth of 7.07 percent in the second quarter of 2021 was the highest since 2005. In the previous quarter, Indonesia grew minus 0.74 percent. With this positive growth, by definition Indonesia is out of recession.
This growth spike is a low base effect because until the first quarter of 2021, Indonesia is still in the negative growth zone. Demand that has been held back also plays a role.
The phenomenon of high growth in the second quarter also occurred in Indonesia’s trading partner countries, such as the United States, China, the European Union, and India. Similar to a spring, if pressed harder, it will produce a greater rebound force.
The surge in Indonesia’s economic growth in the second quarter of 2021 was due to “revenge” spending, especially for leisure, such as hotels and restaurants, tourist trips, and the like. The role of the middle class, which according to data from the Ministry of Finance in 2019 reached 21 percent of the total population or 57.3 million people is very important in explaining the surge in growth after being confined by the pandemic.
However, these signs of recovery were accompanied by a daily spike in new cases, which led the government to impose PPKM level 4 since the first week of July 2021. The impact of the restrictions is reflected in forward-looking economic indicators. The manufacturing sector procurement managers’ index (PMI) fell sharply in July 2021 to 40.1 from 53.5 in June, down 25.19 percent. This PMI figure is the lowest in the last 13 months.
The decline occurred because companies became more careful in managing the procurement of raw/auxiliary materials for the production process. They anticipate consumers will tighten spending again. In addition, managers began to feel the decline in export orders due to slowing growth in China, which was then transmitted to world supply chains.
On the demand side, the consumer confidence index (IKK) in July fell to 80.2 from 107.4 last June, down 25.3 percent. This percentage decline is due to public pessimism about the economic conditions in the next six months, both in terms of business activities and the availability of jobs.
Long term growth path
The question is whether the spike in this pandemic will affect the economic recovery so that the process of returning to long-term growth equilibrium is hampered or at least delayed. Sectoral growth data shows that momentum is still quite strong despite restrictions on mobility. This is because people feel they need a change of atmosphere and a new spirit.
First, the surge in growth in the transportation and warehousing sector of up to 25.1 percent. This sector experienced the deepest contraction due to the impact of the pandemic. The second highest growth was achieved by the accommodation and food and beverage sector with 21.57 percent. This sector was the second worst hit ever. Next, for the high-growing sector, is services.
The sectoral gross domestic product (GDP) growth was confirmed on the expenditure side. Expenditure on hotels and restaurants grew 16.29 percent on an annual basis in the second quarter. This indicates that prior to the implementation of PPKM level 4, an inertia momentum was formed due to the stagnant demand for leisure. This momentum could continue in the third quarter of 2021, mainly due to the relaxation of the PPKM level 4 in mid-August in response to the significant decline in daily positive cases.
Forward-oriented indicators are already showing a move back into the positive/upbeat zone. From the production side, the PMI figure rose to 43.7 in August, up 8.98 percent in a month. Still in the contraction zone, partly due to the slowdown in exports and supply chain disruptions due to disruption of port activities. The reason is the buildup of containers and the closure of one of the ports in China.
The distance of the August index to the boundary of the expansion contraction zone is not as far away as it was at the April-May 2020 low. It is expected that, in the two months from July 2021, the PMI figure will be close to 50 or even exceed it. Apple.inc data sources show that there has been a 20 percent increase in driving activity between July and August.
Like experiences in other countries, there should be no euphoria that the situation is safe. For example, Vietnam, which was previously considered one of the best in handling Covid-19, is now struggling to suppress the spread of the pandemic. Anecdotal examples show that the routes to tourist areas around agglomeration of cities, such as Puncak and Lembang, are congested on weekends. The odd-even policy has been implemented on the Bogor-Puncak route, and there is consideration to extended this to the Cianjur border.
PPKM level 4 succeeded in lowering the 7-day moving average of new positive cases, from 50,039 on July 18, 2021 to 8,057 cases on September 2. The spike in the pandemic after the Eid homecoming ban came from the phenomenon of a broken dam that caused a resurgence of new cases in June-July. Learning from this experience, the government implemented a gradual relaxation of PPKM as a signal that vigilance must be maintained.
Source: Kompas Daily. Edition: Tuesday, 7 September 2021. General-Economic Analysis Column. Page 1 continued on Page 15.
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