Coping with the Threats of Recession

Indonesia\'s economic performance in the third quarter of 2019 showed further decline as it grew only 5.02 percent year-on-year. It means that the average growth until the third quarter of 2019 only reached 5.04 percent.

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

In fact, the slowing economic growth also hit almost all countries. The Organization for Economic Cooperation and Development (OECD) even projects that global economic growth in 2019 will only reach 2.9 percent.

Likewise, the economic growth of the G-20 member countries is predicted to grow by only 3.1 percent. With the downward trend in the global economy, we often justify that Indonesia\'s economic growth of 5 percent is normal. In addition, the impact of the trade war between the United States and China will also affect the economic growth.

The external condition is often used as a scapegoat for the stagnation of the domestic economy. In fact, it is clear that Indonesia\'s economic openness (export) is only around 20 percent, and the other 80 percent is contributed by domestic factors, namely household spending and investment.

In addition, the trade war does not always have a negative impact. Vietnam, for example, becomes the winner from the trade war. The country did not only receive a lot of investment from China but also can replace various Chinese exports to the US.

Moreover, export growth dropped to 0.02 percent from 8.08 percent in the same period.

In contrast, Indonesia\'s investment growth declined to 4.21 percent in the third quarter this year from 6.96 percent in the same period last year. Moreover, export growth dropped to 0.02 percent from 8.08 percent in the same period.

It indicated that instead of replacing Chinese products, the Indonesian market has become the life buoy and the destination of Chinese exports. The contribution of imports from China reached 29.46 percent, while exports to China were only 16.4 percent.

It was not surprising that during January-October 2019, Indonesia\'s trade passed the $1.787 billion mark. Ironically, the trade deficit was not only caused by a decline in exports (minus 7.8 percent), but also due to a greater decline in imports (minus 9.94 percent).

KOMPAS/M PASCHALIA JUDITH J

Statistics Indonesia (BPS) head Suhariyanto (left) speaks at a press conference on Friday (15/11/2019) in Jakarta, explaining Indonesia\'s October 2019 balance of trade.

Worse, imports of raw materials and intermediary goods fell by 11.19 percent on an annual basis while imports of capital goods dropped by 4.94 percent. Organic chemicals dropped by 15.52 percent and cereals fell by 14.18 percent. The two commodities are raw materials for the food and beverage industry, which accounts for almost 30 percent of the non-oil and gas industry.

If in the third quarter of 2019, the processing industry grew 4.15 percent, with the decline in imports of raw materials in the future will inevitably plummet. Evidently, the Purchasing Manager’s Index (PMI) for manufacturing in 2019 dropped to 47.7.

PMI reflects the optimism of the business sector toward the economic outlook. A PMI number above 50 means manufacturing is expanding or growing, but if it\'s below 50, it means the industry is declining.

Since July 2019, Indonesian PMIs have been below 50, respectively 49.6 percent in July, 49 percent in August and 49.1 percent in September. The weak growth of the manufacturing industry is certainly not caused by trade wars, but rather due to the decline in the quality of investment and the massive shifting in investment to the service sector.

If it\'s below 50, it means the industry is declining.

Data from the Investment Coordinating Board (BKPM) indicate that investment growth mostly occurred in the service sector. In comparison, at the end of 2013, the composition of investment realization in the primary sector reached 22.6 percent, secondary 55.4 percent, and tertiary 22 percent.

However, in 2018, the composition of the investment in the secondary sector fell to 35.3 percent, the primary sector declined to 16.5 percent, while that of the tertiary rose to 48.2 percent.

In fact, during January-September 2019, the investment portion in the manufacturing sector was only 24.5 percent, while the service sector was 59.0 percent.

The shifting in investment interest cannot be underestimated. The national interest will be under threat if we are unable to improve productivity and competitiveness. As a country with abundant resources, Indonesia needs an investment that can process raw commodities into products with high added value. At the same time, the processing industry is able to provide a large employment so that Indonesia can benefit from the demographic dividend.

KOMPAS/PRIYOMBODO

A retail supermarket in South Jakarta, Saturday (9/11/2019). The Indonesian economy in the third quarter of 2019 grew 5.02 percent. Household spending, which grew 5.01 percent, contributed greatly with a portion of 56.52 percent.

Conversely, if investment only enters the service sector, such as transportation services, telecommunications, and trade, it will inevitably only trigger exploitation of domestic economic resources and economic inequality.

The services that develop will further trigger an increase in imported products that could in turn kill the domestic industry. Indonesia will only become a source of cheap raw materials.

Far more important, if the de-industrialization is not mitigated immediately and appropriately, the economic fundamental will further worsen. In other words, the massive deindustrialization will trigger a massive layoff in the manufacturing industry.

This means that even if the open unemployment rate falls, the sharp increase in working age as part of the demographic bonuses can only be absorbed by the informal sector. As a result, people\'s income, purchasing power, household consumption and economic growth will further decline. Not to mention the effects of the increase in electricity tariff, BPJS health insurance premiums, to the price of liquefied petroleum gas (LPG), which, of course, will also reduce the purchasing power.

Therefore, the government must be careful and look at economic growth figures in detail. Not only based on statistics, but also on the quality of growth that is far more important.

The government must be careful and look at economic growth figures in detail.

If the growth elasticity of employment creation is below 200,000, surely it will not be enough to meet the additional new workforce. It means if new jobs as the main basis for sustaining public consumption cannot be increased, the recession, of course, will only a matter of time.

Therefore, concrete efforts must be made to save industries that are still competitive but dying, especially labor-intensive industries, such as the textile and textile products, footwear, electronics and steel industries.

The textile industry faces the onslaught of imported products from China due to the cut in import duty on fabric products to 0 percent. The government must immediately harmonize tariffs and implement safeguard policies to protect the textile industry, such as those taken by Turkey, Brazil and India. The application of the standardization of imported products is also needed in order to curb the influx of imported goods.

ENNY SRI HARTATI, Senior Researcher, Institute for Development of Economics and Finance (Indef).