New COVID-19 Emergency Measures Threaten to Derail Indonesia’s Economic Rebound in 2021
Lockdowns and restrictions imposed by governments around the globe in an effort to curb the further spread of COVID-19 in society as well as people’s fear to contract COVID-19 resulted in an unprecedented decline in consumption, production, trade, tourism and investment, particularly in the second quarter of 2020.
For Indonesia the subsequent economic recession started in Q2-2020 with negative economic growth touching a whopping 5.32 percent year-on-year (y/y). However, in following quarters we saw the situation gradually improving (see table below).
There are a number of reasons why there occurred an improvement (in the form of an easing economic recession). Most notably, the social and business restrictions were toughest in Q2-2020 when the COVID-19 pandemic really started in Indonesia. When these restrictions somewhat eased in the following quarters it provided some room for a higher degree of economic activity (albeit remaining far from the ‘normal’ levels of economic activity seen in the pre-COVID-19-crises times).
Moreover, fear somewhat eased. At the beginning of the pandemic the World Health Organization (WHO) even stated that COVID-19 has an infection mortality rate (IFR) of between 3 and 4 percent. That is indeed scary, and so people preferred to stay at home rather than going outside. When people, perhaps subconsciously, noticed that almost all who contract a COVID-19 infection survived the virus, while the WHO’s IFR was cut to around 0.2, people also became more confident to go out again (which is reflected by a rebound in various economic indicators). Possibly, the vaccination program of Indonesia that started in mid-January 2021 also helped Indonesians to regain some confidence (although renewed confidence based on the immunization program would – for now – not be based on facts or evidence).
And so, the economic recession should end for Indonesia in Q2-2021 (partly thanks to the low base effect as the crisis had peaked for Indonesia in Q2-2020). Earlier, Indonesia Investments set its projection for Indonesia’s Q2-2021 economic growth at a modest +3.50 percent (y/y). However, after we received the latest retail sales, consumer confidence, and manufacturing PMI data of Indonesia, we felt a revision was needed as household consumption seems to have recovered quicker, and better, than expected. Retail sales, for instance, rebounded 15.6 percent (y/y) in April 2021 (the first month of the second quarter), effectively ending the country’s 16-month-retail-sales-contraction streak. This rebound, partly, comes on the back of the so-called Ramadan effect (followed by Idul Fitri celebrations) when consumption tends to peak). While these celebrations were still modest in 2021 (due to restrictions and a travel ban) compared to normal years, they were, at least, better than in 2020. And so, for Q2-2021 we revised our forecast for Indonesia’s economic growth from 3.50 percent (y/y) to the range of 4.0–5.0 percent (y/y). Next month – typically around 5 August – we expect Indonesia’s Statistical Agency (or BPS) to release the official GDP data.
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