WARDING OFF A GLOBAL RECESSION Is Indonesia’s economy at risk?

(IO/Pramita Hendra)

Strengthening the domestic economy 

The main factor that supports the Indonesian economy is its huge market. This allows it to continue to grow in the midst of difficult situations. In other words, if the domestic market demand can be sustained, the economic growth outlook will continue to be bright. This means that a recession can be avoided if efforts to strengthen the domestic market are continuously carried out. 

Reinvigorating the domestic market requires stability in purchasing power from the consumer side and sufficient supply of goods and services from the producer side. If one of them is impacted, inflation will rise and the economic pressure becomes much more difficult to deal with. 

Therefore, with the current domestic economy driven by household consumption, the strategy to strengthen the domestic market needs to take both the consumer and producer side into account. 

From the consumer side, there are indications that consumer optimism remains strong so far. This can be seen from the Consumer Confidence Index (CCI) which still hovers above 100 (128.2 in June). In addition, the current Economic Condition Index is also above 100 (114.5 in June). Likewise, the Index of Consumer Expectations is at 141.8 in June. Taken together, these indices denote an economy in optimistic territory, despite the looming global recession. 

(IO/Pramita Hendra)

From the macro side, the economic recovery is still on the right track, although it may not be able to accelerate faster due to the global uncertainty. Economic growth in the first quarter of 2022 stood at 5 percent, which indicates that the recovery is underway. While there is upward trend of inflation (which touched 4.35 percent yoy in June), this value is still relatively moderate compared to Indonesia’s inflation in 2014, which registered 8.36 percent, due to the US stimulus withdrawal. The current spike is driven by rising inflation from volatile goods, administered prices and core inflation. 

We can also see that the current domestic economic recovery is still strong from the rebound of goods and people movement as the pandemic subsides. When Indonesia entered a recession in 2020, the supply and demand sides were simultaneously disrupted. This further shows that the resilience of Indonesia’s economy lies at the strength of its domestic economy. So far, it can be said that the Indonesia’s economy is quite “immune” to the risk of looming global recession. 

Of course, we must remain alert and not be consumed by excessive euphoria. The increase in global commodity prices can potentially hit consumer pockets as some industrial sectors are still heavily reliant on imported raw materials. As a result, an increase in commodity prices will be followed by an increase in raw material prices. The implication is that producer price inflation will certainly increase. This is the challenge currently faced by the domestic economy, where consumer price inflation can be said to be moderate while producer price inflation is quite high. If the upward trend in raw material prices is not stemmed, at a certain point producers will pass on the increase in raw material prices to consumers. This in turn will erode purchasing power and the economy will slow down.