The year 2020 marked the start of the Covid-19 global pandemic, plunging the global economy into a recession, after 3.1 percent contraction. Indonesia’s economy shrank 2.07 percent. For comparison’s sake, the US (the largest economy in the world) saw its GDP contract by 2.2 percent. China, on the other hand, saw its GDP growth nosedive from 6 percent to 2.2 percent.
As the pandemic continued in 2021, Indonesia’s economy managed to grow 3.7 percent (against a target of 5 percent). It was only in 2022 that the government exceeded its growth target by logging 5.3 percent GDP growth. In 2023, the government again failed to meet the target, after the economy grew 5.05 percent (the target was 5.3 percent).
The main cause was the slowing growth of consumer spending, especially in the fourth quarter. Household consumption was only able to grow 4.5 percent in the year. Surging prices of goods, including staples, were holding people back from making non-essential purchases. (FIGURE 2)
2024 target
The global economy is predicted to weaken further in 2024, dipping from 3.05 percent last year and 3.1 percent in 2022. Several international financial institutions forecast a slowdown: The World Bank (2.1 percent), IMF (2.4 percent), and OECD (2.7 percent). Several developed countries have already slid into a recession. Germany, Europe’s economic powerhouse, saw its GDP shrinking by 0.3 percent in the first quarter of the year, following a decline of 0.5 percent in the fourth quarter of 2022. The UK economy has also officially entered a recession, when its Q4-2023 GDP fell by 0.3 percent, following 0.1 percent contraction the previous quarter. A recession is defined as two consecutive quarters of negative growth.
As we all know, the global economy is on precarious footing, amid persistent inflationary pressures and high interest rates. Argentina is still mired in hyperinflation. Turkey is seeing an inflation rate of more than 65 percent. This situation has forced many central banks to tighten their monetary policies by raising short-term interest rates. As a result, the real sector has been impacted.
A slowdown in the world’s second-largest economy, China, has also added to global economic woes. It grew by 5.2 percent in 2023 and is projected to only grow by 4.6 percent in 2024. Its property sector, which accounts for nearly a third of the country’s economic activity, is in crisis, as the housing bubble burst, triggered by the collapse of Evergrande, China’s second-largest real estate developer. This has in turn raised fears of financial contagion, as Chinese households’ savings and wealth have become increasingly intertwined with property ownership. Exports, another major pillar of growth, also posted their first full-year decline since 2016, as global demand faltered and prices fell. As such, they have to increasingly rely on household consumption, which has also also slowed considerably.
Meanwhile, Indonesia’s growth target for 2024 is 5.2 percent. This is lower than The World Bank’s projection of 4.9 percent and IMF’s 5 percent. Based on historical experience, they are likely to be revised down again as the year progresses.
There are several factors that have led us to this economic slump. First, there is pressure on purchasing power, especially among the lower-income households, which in turn affects private consumption, which accounts for more than half (55.2 percent) of nominal GDP in 2023. Domestic inflation has tended to increase. In February 2024, it has reached 2.75 percent, up from the 2.28 percent recorded in September 2023, as prices of staples, especially rice, surged, thanks to extreme weather events and global geopolitics.
Second, moderating loan growth to the real sector, which indicates a lack of stimulus for investment and business expansion. BI rate is still at 6 percent. An era of high interest rates (higher for longer) is also holding back domestic business players from embarking on market expansion and a hiring spree.
Third, the global commodity boom, which previously generated windfall profits for Indonesia’s exports, hitting government revenues from commodity-related incomes and economic activities.