Ari Kuncoro: Predictions about Growth Momentum
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK, Tuesday, 16/6/2020 – Kompas daily published an article written by Universitas Indonesia Rector Prof. Ari Kuncoro entitled Predictions about Growth Momentum in its Economic Analysis colum. Below is the article.
Predictions about Growth Momentum
Just like the new type of coronavirus that mutates unexpectedly, forecasts for the world economy also vary greatly. Good news comes after bad news and vice versa. The US stock market that entered the bullish zone in an optimistic tone in the first week of April joined others in riding the wave of optimism brought about by relaxation in the economy. However, this optimism declined in early June, with the Dow Jones correcting by 6.9 percent and the S&P 500 by 5.9 percent due to fears of a second wave of Covid-19 transmission.
Surprisingly, the US unemployment rate dropped in May, the first time since the Covid-19 pandemic, from 14.7 percent to 13.3 percent, with 2.5 million additional job opportunities available. This influenced a survey of 34 leading quantitative macroeconomists by the National Bureau of Economic Research in collaboration with the University of Chicago Booth School of Business. According to the latest predictions, US unemployment rate will fall below 10 percent before 2020 ends.
However, the positive news on the US labor market is offset by a pessimistic forecast by the Organization for Economic Cooperation and Development (OECD), which stated that world economic growth will contract by least 6 percent in 2020. In fact, with the threat of a second wave of the pandemic, a 7.6 percent contraction is possible.
The world economy is predicted to grow 2.8-5.2 percent in 2021. The wide gap indicates that forecasters are dealing with the issue of uncertainty. Like an orchestra, the World Bank adopted a similar tone and revised down its forecast to a more pessimistic direction, that global will would contract by 5.2 percent, although it is still more optimistic than the OECD.
Predictions for Indonesia
These confusing predictions bring to mind Dornbusch’s (1976) overshooting concept. Economic variables will move out of sync with their long-term equilibrium because economic players, including international institutes of forecasters, only have limited information. This is understandable because the Covid-19 pandemic has created uncertainty despite efforts to prevent transmission.
The OECD predicted that Indonesia will grow by minus 2.9 percent to 3.9 percent in 2020, although it will accelerate to 5.2 percent in 2021. The World Bank made an even lower prediction, below zero percent in 2020 and 4.8 percent in 2021. The World Bank noted the potential for a contraction of 3.4 percent if the large-scale social restrictions last for four months. In a more optimistic tone, US magazine Politico placed Indonesia after Vietnam, China and Taiwan as countries that could maintain a balance between preventing transmission and minimizing the impacts of recession, even though it set the conditions for achieving the balance.
Statistics Indonesia data offers two ways of looking at growth, annual and quarterly. First quarter 2020 growth was 2.97% year-on-year. When compared with growth in the previous quarter, it was minus 2.41 percent. This means that the negative impact of the pamdemic on the transportation, trade, hotel and restaurant sectors has been felt since February, amplifying the negative impact of the US-China trade war.
To achieve growth of zero percent or higher in 2020, a significant positive growth in the second, third, and fourth quarters becomes a prerequisite. This is possible if the new normal is accompanied by strict adherence to a healthy and clean life behavior. Two domestic driving factors, namely consumption and investment, are very important. Prospects for exports will be small for the time being, pending positive economic growth of trading partners. The second quarter cannot be relied on because various indicators show that Indonesia is following a downward trend.
The Consumer Confidence Index published by Bank Indonesia fell to 77.8 in May after falling into a pessimistic zone (below 100) in April for the first time ever, at 85.4. Job availability is the main factor behind the pessimism. One of the consequences is that people postpone the purchase of durable goods, such as electronics, furniture and household appliances. On the positive side, for the next six months, the public is quite optimistic that the Covid-19 pandemic will subside. By relying on domestic purchasing power, positive growth is predicted to occur in the fourth quarter of 2020.
In terms of business, the Business Confidence Index (IKB) fell from 105.33 in April to 104.82 in May, although it remained in the optimistic zone. Meanwhile, the manufacturing Purchasing Managers Index (PMI), which shows the confidence of producers to stock up on raw materials, intermediate goods, etc., hit rock bottom, at 27.70, in April before edging up to 28.6 in May. However, this figure is way below the 50 mark that distinguishes between the pessimistic zone (below 50) and the optimistic zone (above 50).
The wide gap between business confidence (which is still optimistic) and production capacity (which is still pessimistic), even if public demand recovers, it has the potential to be met mostly by imported final products because domestic production is still stagnant. The April 2020 trade balance suffered a deficit of US$350 million compared to a surplus of US$2.25 billion in January-April 2020. The deficit in April occurred because the decline in exports was bigger than the decline in imports, which shows that Indonesia’s and the world’s supply chains are still sluggish amid slowing global growth. Exports fell 13.33 percent compared to the previous month, while imports fell 6.10 percent. The decline in imports occurred in consumer goods (0.02 percent), raw and auxiliary materials (7.30 percent), and capital goods (14.12 percent).
Various policies have been implemented while the world economy is still in hibernation. The rupiah exchange rate is practically close to pre-pandemic level. Policy sequencing, from the start of the emergency response to the declaration of the new normal, only spanned a period of three months as lockdowns are being relaxed across the world. Domestic economic recovery is expected to take advantage of the momentum of world economic recovery. As in other parts of the world, the new normal will adopt the “opening and closing” principle according to the development of health and economic indicators of people’s livelihoods in order to balance the two. (hjtp)