Indonesia Falls Into Recession for First Time in 22 Years

Indonesia fell into recession this year for the first time since the Asian financial crisis in 1998 as COVID-19 shutdowns caused a sharp drop in consumption and investment expenditure, but “the worst is over” for Southeast Asia’s biggest economy, officials said Thursday.

Gross domestic product shrank by about 3.5 percent year-on-year in the third quarter, a slight improvement from the 5.32 percent year-on-year in the second quarter, which suggests the country is on a path to recovery, said Kecuk Suhariyanto, head of the Indonesian statistics agency.

“Even though the economy contracted 3.49 percent, it’s not as deep as in the previous quarter. This means that there is an improvement,” Suhariyanto said at a press conference, adding that GDP grew 5 percent in the third quarter from the second quarter.

The recession, defined as two consecutive quarters of a contraction in GDP, comes as Indonesia, the most populous nation in Southeast Asia, struggles to contain the pandemic. The archipelago-nation leads all countries in East Asia in the number of infections and deaths from the coronavirus, followed by the Philippines, which declared a recession earlier this year.

The number of confirmed COVID-19 cases in Indonesia rose by 4,065 on Thursday, taking the nationwide total to 425,796, according to Ministry of Health data.

Household consumption, which accounts for around 57 percent of GDP, declined 4 percent in the third quarter from a year ago, Suhariyanto said. The investment sector, which accounts for around 30 percent of GDP, shrank nearly 6.5 percent percent year-on-year in the third quarter.

These declines were in large part because pandemic restrictions caused a drop in demand and a decline in business activity, which also led to millions of people losing their jobs, analysts said.

Piter Abdullah, research director at the Indonesian Center for Reform on Economics (CORE), said lockdowns to curb the spread of COVID-19 were to blame for the recession.

“We are seeing the impact of the recession, including layoffs and people getting lower income, which results in decreasing demand,” Piter told BenarNews.

In June, Indonesia began the gradual reopening of its economy and public life after three months of partial lockdowns in the country of 265 million people.

However, the government imposed another round of restrictions in Jakarta, the capital, in September, after a spike in new COVID cases, with new infection clusters being traced back to offices, markets and places of worship.

Economy ‘moving towards the positive zone’

Meanwhile, government consumption grew 9.76 percent year-on-year in the third quarter after shrinking 6.9 percent in the second, the statistics agency said.

According to Suhariyanto, this third-quarter surge was a result of increased government spending, thanks to a U.S. $48 billion stimulus package unveiled in June.

The government plans to continue to boost spending to shore up growth, said Edy Priyono, an economic adviser at the Office of the Presidential Staff.

“When the economy is sluggish, government spending becomes the mainstay of the economy,” Edy told BenarNews.

The government said it was optimistic about the outlook for the economy.

“The economy is moving towards the positive zone, the worst is over,” Finance Minister Sri Mulyani Indrawati said during a teleconference on Thursday.

She said the government would focus on recovery in the manufacturing and trade sectors.

“The performance of these two sectors hinges on the handling of COVID-19 because it is closely related to public mobility. Therefore, the government's efforts to contain COVID-19, assisted by all parties, will greatly determine the recovery in various economic sectors,” Sri Mulyani said.

Millions jobless

On the jobs front, the unemployment rate surged to slightly above 7 percent in August, the highest since 2011, the statistics agency reported.

Until August this year, 2.6 million people had lost their jobs, bringing the total number of unemployed to 9.77 million. Around 24 million people have had their worked hours reduced.

In early October, Indonesia’s parliament enacted a job creation bill which, proponents said, was designed to attract investment, despite opposition from activists and labor rights groups who said it would curtail workers’ rights.

The government said the law was intended to attract investment and cut red tape.

However, the recession could cause even more job losses as companies face the prospect of closure, said Bhima Yudhistira Adhinegara, an economist at the Institute for Development of Economics and Finance (INDEF).

“With layoffs still occurring, the number of jobless and poor people will continue to increase,” Bhima told BenarNews.

“Social conflicts may increase because inequality is widening. Even if companies do hire, they will prioritize older, experienced employees.”

Last month, Minister of Manpower Ida Fauziyah said the government would try to contain unemployment to less than 10 percent.

“We want the business climate to continue to improve so that the economy can thrive again, which in turn absorbs workforce,” Ida said.

On Wednesday, meanwhile, the Finance Ministry said that only about 52 percent of the government’s $48 billion COVID-19 stimulus funds had been disbursed so far.

Bhima said the government must adjust the stimulus programs to prioritize social safety nets.

“Social protection needs to be strengthened and expanded for the poor and vulnerable middle class. The current budgetary allocation for social welfare is still relatively small, under 3 percent of GDP,” he said.

Regional outlook

Last month, the World Bank reported that the economies of East Asia and the Pacific region as a whole were expected to grow by only 0.9 percent in 2020, the lowest rate since 1967.

The pandemic, it said, had delivered a “triple shock” to the regional economies. These countries are suffering from a triple whammy brought on by the impact of the pandemic, combined with the economic ripples of containment measures and regional impacts of a broader global recession.

Tourism and trade, the mainstay of many countries in Southeast Asia, have also been hit with this “triple shock” and the consequences of the pandemic could reduce regional growth over the next decade by 1 percentage point per year, the World Bank said.

Thailand was pushed into recession as early as in May, as the pandemic hit tourism and domestic activity, the Reuters news agency reported.

In August, the Philippines slipped into a recession after shrinking by 16.5 percent in the second quarter – its worst three-month performance in at least 39 years.

Also that month, the Malaysian economy fell into a recession as GDP plunged 16.5 percent quarter over quarter in the three months to June, according to market analysis firm S&P Global. The slump followed a 2 percent decline in the previous three-month period.