Indonesia’ economy is forecast to contracts by 1.0 percent in this year amid the pandemic before rebounding to 5.3 percent in 2021, said Asian Development Bank recently - Photo by ADB Office

JAKARTA (TheInsiderStories) — Indonesia’ economy is forecast to contracts by 1.0 percent in this year amid the pandemic before rebounding to 5.3 percent in 2021, said Asian Development Bank (ADB) recently. The agency says the country’ economic recovery in 2021 will be supported by the global economy and domestic reforms boosting investments.

The contraction in 2020, which would be the first decline in the Indonesian economy since the Asian financial crisis of 1997–1998, is against a backdrop of overall negative growth projections in the developing Asia, including Malaysia (-5.0 percent), the Philippines (-7.3 percent), and Thailand (-8.0 percent).

“Despite strong macroeconomic fundamentals, Indonesia can expect a difficult growth path for the rest of 2020, with much uncertainty surrounding the scope and trend of the pandemic in Indonesia,” said ADB Country Director for Indonesia, Winfried Wicklein, in an official statement.

He continued, “Moving forward, consistent and coordinated policy priorities that balance between protecting lives and livelihoods, and ensuring the safe restart of business activities, remain crucial to ensure a swift and inclusive recovery.”

The report stated, Indonesia’ consumption contracted in the first half of 2020, as households cut spending and businesses postponed investments. Demand for the country’ exports shrank apace with lockdowns around the world. The government responded by delivering wide-ranging policy responses to mitigate the impacts of the pandemic, including income support for vulnerable households and workers, improvements in health care, and economic relief to businesses.

The report expects household spending to remain low in the near term, with social restrictions imposed to control the spread of the virus. As global and domestic demand stays weak in 2020, trade and investment activity will remain subdued. But the report projects a swift recovery, with pent-up domestic demand lifting the manufacturing purchasing managers’ index above the threshold of 50 in August.

Confidence should also rise as the government provides financing support for investment and business operations. With weak domestic demand in the near term, the inflation forecast for Indonesia this year is revised to an average of 2.0 percent, down from ADB’ April forecast of 3.0 percent.

As household and business spending recovers in 2021, inflation is expected to rise to 2.8 percent. While, the decline in capital goods imports has outpaced the contraction in tourism and commodities export earnings, with the current account deficit now set to narrow to an equivalent of 1.5 percent of gross domestic product (GDP) in 2020.

“Under widespread uncertainty, risks to the outlook tilt to the downside. A resurgence of infections either locally or globally, which will lead to subdued consumer confidence in the long run, could delay the economic recovery. Therefore critical that the government swiftly implement measures to contain the pandemic and promote economic recovery,” said ADB country economist for Indonesia Emma Allen.

Asian Economy

ADB also reported, economies across developing Asia will contract this year for the first time in nearly six decades but recovery will resume next year, as the region starts to emerge from the economic devastation caused by the coronavirus disease.

The Fund forecasts -0.7 percent of GDP growth for developing Asia this year—marking its first negative economic growth since the early 1960s. Growth will rally to 6.8 percent in 2021, in part because growth will be measured relative to a weak 2020.

This will still leave next year’s output below pre-COVID-19 projections, suggesting an “L”-shaped rather than a “V”-shaped recovery. About three-quarters of the region’ economies are expected to post negative growth in 2020.

“Most economies in the Asia and Pacific region can expect a difficult growth path for the rest of 2020,” said ADB chief economist, Yasuyuki Sawada by adding the economic threat posed by the pandemic remains potent, as extended first waves or recurring outbreaks could prompt further containment measures.

He continued, “Consistent and coordinated steps to address the pandemic, with policy priorities focusing on protecting lives and livelihoods of people who are already most vulnerable, and ensuring the safe return to work and restart of business activities, will continue to be crucial to ensure the region’s eventual recovery is inclusive and sustainable.”

Sawada rated, a prolonged COVID-19 remains the biggest downside risk to the region’s growth outlook this year and next year. To mitigate the risk, governments in the region have delivered wide-ranging policy responses, including policy support packages—mainly income support—amounting to US$3.6 trillion, equivalent to about 15 percent of regional GDP.

Other downside risks arise from geopolitical tensions, including an escalation of the trade and technology conflict between the United States and China, as well as financial vulnerabilities that could be exacerbated by a prolonged pandemic. China is one of the few economies in the region bucking the downturn. Its expected to grow by 1.8 percent in this year and 7.7 percent in 2021, with successful public health measures providing a platform for growth.

In India, where lockdowns have stalled consumer and business spending, GDP contracted by a record 23.9 percent in the first quarter of its fiscal year and is forecast to shrink 9 percent in 2020 before recovering by 8 percent in 2021. Subregions of developing Asia are expected to post negative growth this year, except East Asia which is forecast to expand by 1.3 percent and recover strongly to 7.0 percent in 2021.

Some economies heavily reliant on trade and tourism, particularly in the Pacific and South Asia, face double-digit contractions this year. Forecasts suggest that most of developing Asia will recover next year, except for some economies in the Pacific including the Cook Islands, the Federated States of Micronesia, the Marshall Islands, Palau, Samoa, and Tonga.

The inflation forecast for developing Asia is revised downwards to 2.9 percent this year from 3.2 percent forecast in April, due to continued low oil prices and weak demand. Inflation for 2021 is expected to ease further to 2.3 percent.

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