The threat of recession amid powerlessness

(illustration: IO/Agung Wahyudi)

 IO, Jakarta – Global economic growth in 2019 is stalling. Some countries are even suffering negative growth; signs of recession are increasingly apparent. And pessimism about global economic health is also rising, as estimates of global growth continue to be corrected downward, by both the World Bank and the International Monetary Fund (IMF). In June, the World Bank lowered its 2019 forecast to 2.6 percent, down from the its last estimate of 2.9 percent at the beginning of this year. This is in fact far lower than IMF projections that still appear to be quite optimistic, although their estimates are also declining. July 2019, the IMF estimated that global economic growth could still reach 3.2 percent, although that was down from the previous year’s forecast, which was pegged at 3.9 percent. 

Economic growth of the 28 countries in the European Union (EU) in the second quarter of 2019, based on the calculation of the Seasonally Adjusted Annual Rate (SAAR), fell quite sharply, to 0.17 percent compared to the previous quarter (quarter I-2019), or Quarter-on-Quarter (QoQ). Very low; the number signified practically no growth; the first quarter of 2019 (SAAR) still managed to reach 0.5 percent. 

SAAR is the conversion of a quarterly growth calculation to annualized growth, after being corrected by seasonal factors such as the Eid holiday, Christmas or school holidays, when sales tend to increase sharply. This means that economic growth, according to SAAR, is not really influenced by seasonal factors, so that certain quarterly data can be compared with that of other quarters. 

For the eurozone (the term for countries using the Euro currency), economic growth in quarter II-2019 (SAAR) was even lower, at only 0.13 percent QoQ. Growth in quarter II-2019 (SAAR) QoQ was also sharply weaker compared to growth in quarter I-2019 (SAAR) QoQ which reached 0.44 percent. 

Some European countries (as well as the G20) were even afflicted with negative growth in the second quarter of 2019 SAAR (QoQ). Among others, Germany and the UK: German economic growth in the second quarter of 2019 SAAR (QoQ) experienced a contraction of 0.07 percent, while the UK contracted 0.19 percent. The latest data still shows no signs of improvement. German factory orders in August 2019 were still down 0.6 percent. The yield on German government bonds continued to plummet, with the 10-year bond falling to -0.58 percent. These yields have been perched in negative territory for 5 consecutive months, a sign of pessimism about the German economy. 

Based on these data, signs of a global recession are increasingly hard to deny. The US Central Bank (the FED) and the European Central Bank (ECB) began to cut interest rates, adopting a policy of monetary easing (or quantitative easing) to counter the threat of recession. The ECB even asked the leaders of EU member states to immediately implement expansive fiscal policies to spark an economic stimulus, and encourage growth. That implies enlarging budget deficits. 

On the other hand, tighter global liquidity stems the inflow of dollars into economies of developing countries, including Indonesia, which become increasingly sluggish. Indonesia’s foreign exchange reserves in September 2019 fell 2.1 billion US dollars. The global recession has a great potential to staunch the inflow of dollars into Indonesia. Considering how the nation’s current account balance is quite sickly, saddled with an increasingly chronic deficit, a drought in dollar inflows could trigger a Rupiah exchange rate crisis. 

The World Bank and others began to hand down stern warnings about the impact of the global economic downturn on the domestic economy in many countries of the world. Indonesia is one of the most vulnerable to the negative effects of a global economic downturn, which could cause Indonesia’s economy to stall and fall into a recession. The impact could be very severe because it is likely that a recession would be characterized by a drop in the Rupiah exchange rate. In this case, inflation due to rising costs of imported raw materials (cost-push inflation) would rise sharply, which of course will impair purchasing power and damage consumption. 

Indonesia’s economic growth up until the middle of this year has also slowed down: the first two quarters of 2019, compared to the same period last year, Year-on-Year (YoY), respectively only marked 5.07 percent and 5.05 percent. This growth was created amid falling exports and imports. What is quite alarming is the sign that investment growth this year is quite feeble: the contribution of investment to economic growth in the second quarter of 2019 was only 1.59 percent, much lower than the investment growth in 2018 at 2.17 percent. 

Both exports and imports experienced a sharp contraction this year. Our 2019 trade balance performance is very bad. Statistics Indonesia (BPS) has just announced export-import data for September 2019. The results, as expected, are very disappointing, with a deficit of 160.5 million US dollars. Exports in September 2019 dipped by 5.74 percent compared to September 2018, while for the January-September 2019 period, exports were down 8 percent. This export-import data shows that Indonesia’s economic condition is currently very weak, and is becoming increasingly weaker and vulnerable to crises. At any time the Indonesian economy can slip away. Without power. 

Non-oil and gas export data are also disappointing. Non-oil exports as the backbone of the Indonesian economy in September 2019 fell 2.7 percent (YoY), whereas for the January-September 2019 period, non-oil and gas exports dropped 6.22 percent (YoY), from 134.96 billion US dollars to 124.17 billion US dollars. 

This year’s trade balance seems to continue on with last year’s deficit. The trade balance until the end of September 2019 recorded a deficit of 1.9 billion US dollars. Indeed this deficit is lower than the deficit for the same period last year. Sadly, the cause of the deficit reduction was not due to improved export performance, but rather due to relatively lower oil prices this year compared to last year, so that the oil and gas deficit fell by 3.01 billion US dollars, from a deficit of 9.45 billion US dollars to a deficit of 6.44 billion US dollars. 

The trade balance deficit adds in turn to the burden of the current account, which has also been experiencing chronic deficits for the past 8 years. The current account deficit in quarter II-2019 again crossed the psychological deficit pegged at around 3 percent of GDP (Gross Domestic Product). This current account deficit, in turn, will put a great deal of pressure on the Rupiah exchange rate, which is currently being saved through an excessive withdrawal of state debt, only for Rupiah exchange intervention. 

The global recession is also feared to make the price of Indonesia’s main export commodities fall even further. If this happens, the trade balance deficit and current account deficit will both inevitably swell, since the Indonesian economy still relies heavily on commodities. All of this will increase the risk of a currency crisis, exacerbated by the risk of a falling Rupiah. 

Bad economic news not only comes from export-import figures. Realization of sales data from several other sectors is also disappointing, and shows the Indonesian economy is truly in a crisis-prone condition. Car sales from manufacturers to dealers (wholesale) until the end of August 2019 dropped, or contracted, 13.4 percent. A very worrying contraction rate. Car sales for the first 8 months of 2018 were recorded 763,444 units, and are now down to 660,286 units in the same period in 2019. 

Domestic cement sales (January-September 2019) also settled, by 2.2 percent. This data reveals stagnant infrastructure development. The government seems to have no more money to spearhead economic growth through infrastructure development, one reason for which is that government tax revenues are weak. The realization of tax revenue until the end of August 2019 was only 51.51 percent of the target. This is a very large shortfall in tax revenues, one which can rapidly degenerate into a state budget crisis. This would in turn force the government to slash items from its budget. If not, the budget deficit will sharply exceed the deficit limit allowed by law, which is 3 percent of GDP. Reducing this budget will certainly impair economic growth. 

The above conditions indicate the government has run out of power to be able to sustain economic growth. Thus, we are made to surrender to enjoy an economic downturn, while patiently waiting for the next economic upward cycle, which we cannot predict with certainty. On the contrary, for sure, soon, we will have to prepare ourselves for the worst, where our economy can sink even deeper. The threat of a global economic recession is no longer an illusion: it is taking place today in several developed countries. Recent economic data shows that Germany and Britain are almost certain to enter a recession. Hopefully, the European Union can restrain the rate of economic decline through loose monetary policies and expansive fiscal policies, thus stimulating global economic growth. 

Other sectoral data also show that Indonesia’s economy is stagnant. Among other things, electricity consumption data. Up till the end of September 2019 electricity consumption for industrial customers only grew 1.13 percent, from 56.26 TWh (terawatt hour) to 56.9 TWh. The increase in electricity consumption has included the addition of new industrial customers. That is, electricity consumption by old industrial customers can be said to be stagnant, maybe even growing negatively, which would also show economic activity is stagnant. 

In dealing with the risk of recession as projected above, decisions on economic policies to be taken by the government in the future are very critical. In a recession-prone condition, the government should adopt an expansionary fiscal policy. However, its ability in this matter is really very limited. Instead of taking an expansionary fiscal policy, the current fiscal policy is going in the opposite direction. The current fiscal policy is far from the interests of the national economy. The policy taken is more focused on reducing the budget deficit or increasing state revenues. The way to do this is by increasing various types of levies and/or tariffs which are burdensome to public finances, especially the lower classes. For example, cigarette excise, BPJS fees, 900 VA electricity tariff, toll tariff. The increase in fees and tariffs will certainly erode the purchasing power of the people, and in turn squeeze off public consumption, stall economic growth and speed up the progress towards recession and crisis. 

Considering the government’s limited fiscal policy capability, it is believed to have difficulty lifting the national economy out of adversity. It is expected to find it difficult to provide any economic stimulus, because state revenue has fallen so dramatically. The government no longer has any money, frankly. The ratio of tax revenue to GDP in quarter II- 2019 is already below 9 percent. Very low. With this achievement, a huge shortfall will occur, reaching more than IDR 300 trillion. As stated above, this development would impel cuts in state spending, which will further hurt economic growth. The threat of recession is increasingly apparent. But alas, the government’s ability to overcome this threat is very limited. 

The coming days are full of misgivings; it is hoped that the government has a powerful stance to overcome all these problems. May the global economy improve soon. 

Anthoy Budiawan 
Managing Director of Political Economy and Policy Studies (PEPS)