IHS Markit reported activity restrictions will stall global real GDP growth in the first quarter of 2021, with most of Europe in recession - Photo by OECD

JAKARTA (TheInsiderStories) – The Organization for Economic Co-operation and Development (OECD) predicts that the global economy will contract at least 6 percent in this year, suppressed by the COVID-19 pandemic. While, Indonesia’ economy has the potential to contract 3.9 percent if there is second wave of the epidemic and will rebound again next year to 5.2 percent.

The agency said, Indonesia officially announced its first two cases of the virus infection in early March. A month later, the COVID-19 outbreak had infected all provinces in the country.

OECD rated, the outbreak control efforts in Indonesia is not too strict when compared with other Southeast Asian countries. The focus of controlling outbreaks is more directed at closing schools, maintaining safe distances, working remotely and prohibiting travel to and from abroad.

However, when the number of cases jumped significantly, the semi-lockdown policy or known as the large-scale social distancing as implemented in various regions. The government of Indonesia also declared the COVID-19 outbreak as a national disaster and established a ban on the Eid Al-Fitr for this year. Behind all the efforts, the OECD also highlighted the coordination between the central government and the regions that were considered ineffective.

The virus outbreak that began in Wuhan, Hubei Province, China has triggered a turbulence in the Indonesian economy. In the first quarter of 2020 the economic growth was recorded at 2.97 percent compared to last year. Slowing household consumption which is the backbone of the domestic economy has made the country’ economy drop significantly.

Since March, a number of indicators have shown that the Indonesian economy is in danger. The manufacturing PMI has contracted. Motorcycle and car sales fell sharply, consumer confidence eroded to a low inflation rate is a reflection that the Indonesian economy is clearly not resistant to outbreaks.

Pandemics that spread throughout the world have also hampered the mobility of people and funds. The number of tourist arrivals dropped dramatically, investment projects had to be postponed and focus on disaster control. Economic activity has also lost momentum, the labor sector has also been affected, the number of employees affected by termination and laid off has increased.

The group that suffers the most is those in the informal sector who make up two-thirds of the total Indonesian workforce who depend only on daily income. Seeing this alarming condition, the OECD estimates that the Indonesian economy will experience a contraction of -2.8 in this year. This estimate refers to the OECD assumption that if an outbreak occurred at a time.

However, if a second wave of outbreak arises, the economic impact will be even more significant. The contractions that occur will be deeper. OECD estimates that if Indonesia arrives in the second wave of outbreaks, the economy will contract to minus 3.9 percent in this year.

OECD said, the COVID-19 pandemic has triggered the most severe recession in nearly a century and is causing enormous damage to people’ health, jobs and well-being. As restrictions begin to ease, the path to economic recovery remains highly uncertain and vulnerable to a second wave of infections. Strengthening healthcare systems and supporting people and businesses to help adapt to a post-COVID will be crucial.

The containment measures brought in by most governments were necessary to slow the spread of the virus and limit the death toll, but they have also closed down business activity in many sectors and caused widespread economic hardship. Policymakers have used a vast array of exceptional measures to support healthcare systems and people’s incomes, as well as to help businesses and stabilize financial markets.

With little prospect of a vaccine becoming widely available this year, and faced with unprecedented uncertainty,  the OECD has taken the unusual step of presenting two equally likely scenarios – one in which the virus is brought under control, and one in which a second global outbreak hits before the end of 2020.

If a second outbreak occurs triggering a return to lockdowns, world economic output is forecast to plummet 7.6 percent this year, before climbing back 2.8 percent in 2021. At its peak, unemployment in the OECD economies would be more than double the rate prior to the outbreaks, with little recovery in jobs next year. 

Euro area GDP is expected to plunge by 11.5 percent in this year if a second wave breaks out, and by over 9 percent even if a second hit is avoided, while GDP in the United States will take a hit of 8.5 percent and 7.3 percent, respectively. Then, Japan 7.3 percent and 6 percent.

Emerging economies such as Brazil, Russia and South Africa, meanwhile, face particular challenges of strained health systems, adding to the difficulties caused by a collapse in commodity prices, and their economies plunging by 9.1 percent, 10 percent, and 8.2 percent respectively in case of a double hit scenario, and 7.4 percent, 8 percent, and 7.5 percent in case of a single hit.

China’ and India’ GDPs will be relatively less affected, with a decrease of 3.7 percent and 7.3 percent respectively in case of a double hit and 2.6 percent and 3.7 percent in case of a single hit.

In both scenarios, the recovery, after an initial, rapid resumption of activity, will take a long time to bring output back to pre-pandemic levels, and the crisis will leave long-lasting scars – a fall in living standards, high unemployment and weak investment. Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low-skilled, young, and informal workers.

The  government support to help people and business in the hard-hit sectors will need to evolve but to remain substantial. Extraordinary policies will be needed to walk the tightrope towards recovery.

Restarting economic activity while avoiding a second outbreak requires flexible and agile policymaking. The safety nets and support currently provided for badly hit sectors would need to be adapted to help businesses and workers move to new activities.

Higher public debt cannot be avoided, but debt-financed spending should be well-targeted to support the most vulnerable and provide the investment needed for a transition to a more resilient and sustainable economy. Governments must seize this opportunity to build a fairer economy, making competition and regulation smarter, modernizing taxes, government spending and social protection.

Then, prosperity comes from dialogue and co-operation. This holds true at the national and global level. The Outlook calls for stronger international co-operation to help end the pandemic more quickly, speed up the economic recovery, and avoid harming the catch-up process of emerging-market economies and developing countries.

It also argues for encouraging more resilient supply chains, including larger holdings of stocks and more diversification of sources locally and internationally.

by Laurence Boone Chief Economist at OECD