Jakarta, IO – No later than 2023, a global economic recession is predicted. Food price inflation is a problem in many nations, and the post-pandemic recovery is undoubtedly sluggish. According to the Conference Board, a recession will most certainly start anytime in the next 12 months, by October 2023 at the latest. The likelihood of an economic recession has increased due to a significant slowdown in global economic growth and monetary tightening.
The biggest concern is a slowdown in estimates of economic growth in developing nations. The OECD stated that inflation in a number of nations had risen to its greatest level since the 1980s in the first half of 2022 in a report titled “Paying the Price of War.” The Ukraine conflict, which is not likely to finish soon, has disrupted the flow of several different raw commodities through supply networks. Semiconductors, which are essential components in electronics and automotive applications, are also threatened by China’s stated intention to expand its military and annex Taiwan. Additional dangers, or “China factors,” will exist.
China factor
The causes of the recession are even more complex. Indonesia needs to be more attentive to China’s internal economic conditions than to those of the US and the EU zone. The property crisis following the colossal Evergrande default is still being felt in the broad financial sector in China. Note that the real estate sector in China accounts for a whopping 29 per cent of total gross domestic product (GDP) and 30-40 per cent of total bank loans, according to a report by Economic Times. The Caixin Services Purchasing Managers’ Index, indicator of the services sector of China’s economy, dropped to 36.2 in April from 42 in March (a figure below 50 indicates contraction). The systemic effects of the deflating property bubble in China can spread faster than the effects of stagflation in Europe and the US.
Indonesia’s relations with China are expected to become excessively dependent within a couple of years. As much as 30% of imported products, including essential industrial raw materials, are obtained from China, and the export market to China accounts for 20% of the total Indonesian goods market. If China suffered an economic recession, with GDP only growing by 0.4% in the second quarter of 2022, then Indonesia is certain to see a decline in growth of more than 0.3-0.5%.
A Zero covid policy in China is still being imposed: The Guardian reports that week 2,883 cases were reported this week , recorded across more than 25 provinces, including 227 cases on Wednesday. The impact of a Zero Covid Policy is very much felt in industrial bases such as Shenzhen, where some factories are still having trouble operating, under onerous social restrictions. The ambition to achieve zero cases of Covid19 will have to be paid for dearly by contraction of manufacturing output over the next few months.
Developing countries with vital economic links to China are burdened with deep economic pressures; this is especially the case for those with a high dependence on imported products, exacerbated by a high foreign currency debt. China’s funding for infrastructure projects, quite massive over the last 10 years under the umbrella of the “Belt Road Initiative”, may be affected by various domestic economic realities. It is estimated that China will experience an inward-looking phase, where Chinese investors are more circumspect about investing in ambitious projects. Meanwhile, Indonesia itself is pursuing the completion of infrastructure projects co-funded with China, for example the Jakarta-Padalarang High-Speed Railway. Funding difficulties for this project may encounter a contingency risk, with train construction charged to the state budget.
Trade volume drop
Apart from the China factor, it can be surmised that the current economic recession is worse than those of 1998 and 2008. Indications of an economic recession can be seen in a steeply-declining flow of world trade. Baltic Dry Index data, which measures logistics flows globally, on October 7 recorded a decrease of 64.5% compared to October 2021, sagging to a level of 1,961. Trading volume sharply corrected, due to supply problems and low demand in industrialized countries such as the European zone and the US.
A decline in the Baltic Dry Index was followed by weakening of various types of commodities, and led to a moderation in Indonesia’s export commodity prices. For example, CPO suffered a spot market correction of – 2 2 . 7 % , year-on-year, followed by iron ore prices correcting -15.5% year-on-year, and steel -33.5%. Weakening commodity prices can lead to poor performance of Indonesia’s trade balance surplus. We are concerned that a “roller coaster” of commodity prices will soon weaken Indonesia’s economic indicators. The commodity bonanza may end in an abruptly-curtailed timeframe.
The main lesson from dependence on commodity exports is that the sensitivity of a country’s economy to price fluctuations are not determined by the producing country. Look at what happened to CPO: from the start of the “cooking oil crisis” in July turned into a disaster for oil palm farmers in just a matter of months, when CPO prices fell sharply back to their June 2021 position. Indonesia, as t h e largest CPO producer, did not function as a single factor determining international prices. (GRAPH 1)