Recession—the beginning or the end?
What we have seen in the past few months clearly shows that Covid-19 has not only hit people's health, but also their welfare. Particularly in Indonesia, where the informal economy is large, the implementation of restrictions on mobility in various areas was a big blow to people's income. The affected income of the people, in turn, hit the level of household consumption, which has been the backbone of the Indonesian economy. The National Accounts data for Q2 2020 showed that household consumption declined instead of rising. Once household consumption declined, its weight in the GDP, which was massive, led the GDP to decline as well.
However, the Indonesian government has worked very hard to maintain the welfare of the people through the massive cash transfer programs. Anecdotally, it can be seen that the program has already benefited the grass roots economy and that people have already started to save again in the banking system. At the same time, there is payment transactions data indicating that in Q3 2020, the Indonesian economy improved significantly, even though it is still below pre-Covid-19 levels.
Given this background, the Indonesian Minister of Finance stated that Indonesia is on the brink of recession. The Minister of Finance has been assured that GDP growth for Q3 2020 will register another negative rate. Statistically speaking, two quarters of negative growth means the country’s economy is in recession. The question that should be asked is whether we are entering a recessionary period or if we are about to leave the recessionary period. Are we at the beginning or the end of the recession?
In the midst of this situation, in August 2020, the Indonesian balance of trade registered its fourth consecutive month of large surpluses. Exports reached $13,069.2 million, down marginally, by 4.62% month over month, and by 8.36% year over year. Meanwhile, imports reached $10,741.8 million, up just 2.65% from the previous month but down by a substantial 24.19% from the previous year. The fall in imports compared with the previous year underscores the slowdown of the domestic economy because of the pandemic. The trade balance in August registered a surplus of $2,327.4 million, a continuation of the series of surpluses from previous months. With the surplus in August, the total trade balance for the first eight months of 2020 stood at a surplus of $11,050.3 million.
The Central Board of Statistics also released the inflation report, which showed continuing deflation, of 0.05% for the month of August. With that performance, year-over-year inflation stood at 1.32%, a level below the Target Corridor of the Central Bank. However, with the goal of maintaining stability in the exchange rate, which is dominant in maintaining business confidence, while still providing stimulus to the economy, the Central Bank decided to keep the benchmark interest rate at 4.00% at its Monetary Policy Meeting in September 2020.
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