Carefully Read the Recession Signals

Many countries have begun to worry about the possibility of an economic crisis or a global recession. A slowdown has occurred in the economies of almost all countries.

KOMPAS/Lasti Kurnia

Traders track stock prices on Wednesday (15/1/2020) at the Indonesia Stock Exchange in Jakarta.

Since the start of 2020, many countries have begun to worry about the possibility of an economic crisis or a global recession, not just because of the failure of the United States and China to reach a trade deal, but also because of the US trade deficit as a result of its trade dispute with the European Union.

A slowdown has occurred in the economies of almost all countries. Even China and India saw their economic growth dip respectively to 6.0 percent and 4.5 percent in the third quarter of 2019.

The economic uncertainty has been worsened further by regional conflicts, from demonstrations in Hong Kong to the US-Iran conflict. Signs of increased risk have been seen in three of the world’s economic giants.

One, it is seen in the decline in the yields of 10- and 2-year US government bonds, which indicates high risk in the short term.

Indonesia still deems it is in good macroeconomic health.

Two, the main economic engines of the European Union, the UK and Germany, have also experienced a slowdown, mainly due to a decline in industrial growth. Three, China\'s declining economic growth has caused a decline in investment, retail sales and production growth.

Indonesia still deems it is in good macroeconomic health, with the economy still growing at 5 percent, inflation under control and the rupiah strengthening impressively against the US dollar this month. Ironically, the Indonesian currency appreciated despite the country’s trade deficit (although the deficit had dropped from US$8.7 billion in 2018 to $3.22 billion in 2019).

However, some circles remain concerned about the stronger rupiah, as it did not strengthen on the back of strong fundamentals like a trade surplus and an increase in direct investment, but on increased capital inflows into portfolio investments. To maintain the capital inflow and to stabilize the rupiah, Bank Indonesia (BI) has maintained its benchmark interest rate at 5 percent since October 2019. As a result, bank credit growth fell from 7.89 percent in September 2019 to 6.53 percent in October 2019.

KOMPAS/LASTI KURNIA

A vegetable seller places chilies on display at the Puri Indah Market in Jakarta on Sunday (26/1/2020). Bank Indonesia (BI) has projected 0.42% inflation in January 2020, driven primarily by the price of chilies, shallots and rice.

The decline in lending growth corresponds with the decline in investment growth. Investment grew only 4.2 percent in Q3 2019, and even non-construction investment grew only 1.95 percent. In fact, investment is the main contributor to increasing productivity, the supply side. This indicates that almost all businesses in the real sector that produce goods (tradeable) are under pressure. The agriculture sector grew by only 3.08 percent, while the manufacturing sector grew by 4.5 percent.

The decline in the performance of the productive sector has had a direct impact on employment, which ultimately affects consumer purchasing power. Consumer spending declined in retail sales in November 2019, which grew only 1.3 percent after growing 3.6 percent in October 2019.

The digital economy that is expected to absorb millions of workers has not performed as expected. The creative industry is still having trouble getting financing while global e-commerce giants continue to expand.

In the midst of these complex problems that require an immediate response, ministries and institutions are focused on discussing the draft omnibus law. We hear little about their programs that respond to actual problems, especially on their efforts to increase investment, reduce the trade deficit, and improve fiscal health.

KOMPAS/ALIF ICHWAN

A truck drives past a stack of containers on 5 Nov. 2019 at the Jakarta International Container Terminal in Tanjung Priok, Jakarta.

Ironically, the planned omnibus law has been met with resistance from workers, environmental activists, and local administrations. In light of this opposition, how can this formula convince investors?

In fact, President Joko Widodo made clear goal of the omnibus law during the 2019 plenary session of the People\'s Consultative Assembly (MPR), that it was intended to increase employment. The problem is the trend of decreasing elasticity, or the ability of investment to create jobs quickly. The 2013 data of the Investment Coordinating Board (BKPM) showed that every Rp 1 trillion in investment was able to provide jobs for 4,594 people. However, labor absorption has declined over the last three years so that every Rp 1 trillion of investment could only provide 1,697 jobs in 2017, 1,331 jobs in 2018 and 1,034 jobs in Q3 2019.

The decline was because investment dominance in the secondary sector, especially the manufacturing industry, had shifted to the tertiary sector (services). In 2013, investment in the secondary sector stood at 55.4 percent, while the primary sector 22.6 percent and the tertiary sector 22 percent. The condition flipped in 2018, with only 35.3 percent investment in the secondary sector, 16.5 percent in the primary sector and investment surging to 48.2 percent in the tertiary sector. In Q3 2019, investment in the service sector even reached 59 percent.

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

Thus, if the main concern is to create jobs, the focus must be on shifting investments back to the labor-intensive manufacturing (secondary) sector. The government needs to prioritize tackling overlapping regulations and offering concrete incentives for the manufacturing sector.