2019 Economic Growth

The latest report from Statistics Indonesia shows that economic growth in 2019 was 5.02 percent. Calculated year-on-year, economic growth in the last quarter of 2019 was 4.97 percent compared to the same period in 2018.

KOMPAS/PRIYOMBODO

Construction workers finish a concrete pillar on 14 Dec. 2019 at the site of the Light Rail Transit (LRT) Jabodebek project on Jl. H.R. Rasuna Said in South Jakarta. According to the World Bank Quarterly Report, Indonesia’s economic growth is estimated to reach 5 percent in 2019 and 5.1 percent in 2020.

In terms of production, weaker growth in the last quarter of 2019 occurred especially in manufacturing, which contributes almost 20 percent to the gross domestic product (GDP). The figure dropped significantly from 4.14 percent year-on-year in the third quarter of 2019 to 3.66 percent year-on-year in the fourth quarter of 2019.

Several other factors compensated for this drop with high levels of growth. However, as their aggregate contributions to economic growth were not as high as that of manufacturing, a slight drop in economic growth still occurred. The agriculture sector, for instance, grew 4.26 percent year-on-year in the last quarter of 2019, up from 3.12 percent in the previous quarter. Accommodation (hotels) and food (restaurants) increased sharply from 5.41 percent to 6.41 percent in the last quarter of 2019. Transportation and warehousing also increased from 6.66 percent to 7.55 percent. However, this was not enough to push GDP growth up from the steady-state growth of 5.0 percent. This was because trade, which takes up 13 percent of GDP, practically stagnated and even slightly slowed from 4.42 percent to 4.24 percent.

This confirms that, in the past six years, Indonesia has been in a Solow-Swan (1956) steady state with a growth trajectory of 5 percent per year, after the end of its commodity bonanza in 2014. A similar phenomenon occurred in other G-20 countries and their long-term growth balance. During the commodity bonanza era, a growth rate of 6 percent was a terms of trade (TOT) effect that temporarily allowed growth above the steady state. This model predicts that productivity improvements, both in terms of physical capital and human resources, will bring the economy to a higher level of permanent long-term balanced productivity.

KOMPAS/TOTOK WIJAYANTO

A woman shops on Sunday (9/2/2020) at a supermarket in Bintaro, South Tangerang, Banten. Consumer spending grew 5.04 percent in 2019, a year-on-year decrease of 0.01 percent. The government needs to take extra precaution in issuing policies that do not affect consumer purchasing power.

Conservatism in public spending

The main factor behind the growth in manufacturing and trade is the more unpredictable public spending patterns due to floods of information, both positive and negative. Increased prudence may be the most appropriate term to portray public sentiment today. In terms of banking, this situation reflects the shift of third-party funds from

savings to time deposits. The situation has been occurring since February 2019. At the time, the unweighted average of growth in time deposits at Book IV banks was 16.8 percent, while the industrial average was 7.6 percent. This shift continued until September 2019, when it began to decline as a seemingly new balance of a more conservative holding of liquid assets was beginning to be achieved.

BPS’s consumer tendency index showed increased optimism in the fourth quarter of 2019 due to positive expectations in household income. Nevertheless, the share of durable goods purchases declined, showing that the people were holding back from spending money.

KOMPAS/PRIYOMBODO

The large granite rocks of Alif Stone Park is empty of visitors on Wednesday (5/2/2020), when the park in Sepempang, East Bunguran, Natuna regency, Riau Islands, was closed. The novel coronavirus outbreak in Wuhan, China, has started to impact Indonesia’s tourism industry, which has recorded the second largest tourist arrivals from China after Malaysia. According to Statistics Indonesia, 1.92 million tourists from China visited Indonesia in January-November 2019, contributing 12.87 percent of the 14.19 million foreign tourist arrivals to the country.

Economic impacts of the coronavirus

The above data and surveys do not include changing public expectations due to the global hysteria surrounding the new coronavirus since late December 2019. Hotels and restaurants will be directly affected and this will spread to trade. Transportation and warehousing will be more resilient due to traffic of goods. The Solow-Swan steady state with an annual growth rate of 5 percent is a stable balance. It will be difficult to grow faster than this.

At the same time, it will not be easy to fall from that balance if we can find new sources of growth.

Nevertheless, it does not mean that government policy will be unnecessary. As public spending shifts to consumption, experience and lifestyle, the new coronavirus will have quite a significant effect on the economy. Over the past five years, the lowest economic growth year-on-year was 4.74 percent in the second quarter of 2015. At the time, trade sector growth was 1.57 percent year-on-year while hotel and restaurant growth was 3.7 percent year-on-year.

Conservative calculations show that if hotels, restaurants and trade weakened to this level again, GDP growth could weaken to 4.86 percent with potential repercussions in manufacturing. The government’s duty is to find the minimum essential growth by compensating for the lapse in foreign tourism with policies that seek to shift public lifestyle spending. Examples include pushing the private sector to give discounts, both for transportation and accommodation, to encourage people to use long holiday and collective leave periods.