Asia-Pacific Countries 2020
Indonesian economy contracts for first time in over two decades
As a result of the global coronavirus pandemic, Indonesia’s economy has suffered its first contraction in more than two decades. The steep decline in economic activity this year has had an impact far greater than previously anticipated, with the threat of recession looming.
Indonesia, Southeast Asia’s largest economy, saw its gross domestic product (GDP) shrink by 5.3 percent year-on-year in the second quarter, according to data from Statistics Indonesia released last Wednesday. The country’s last contraction occurred in the first quarter of 1999, at the tail-end of the Asian financial crisis.
Over the course of the 2000s, economic growth recovered from that economic shock and accelerated to over 4 ̶ 6 percent, becoming the fastest growing economy in the region outside China. Since 2012, however, annual GDP growth has decreased to around 5 percent.
After President Joko Widodo assumed office in 2014, his administration took measures to ease regulations for foreign direct investment, in an effort to stimulate a slowing economy. Even before the pandemic struck, the government was confronting mounting problems, including a weakening currency, decreasing exports, and stagnating consumer spending.
The partial lockdown imposed in April dealt major blows to manufacturing and retail sales. The economy, having grown in the first quarter by almost 3 percent, was expected to shrink 4.6 percent in the April ̶ June quarter, according to a Reuters poll of analysts.
The broad scope of the pandemic impact was also unforeseen, with businesses delaying investments and households curbing spending. Exports were also hit by lower global demand and commodity prices. Indonesian shares responded negatively to Wednesday’s released data, with the benchmark stock index slipping nearly 0.3 percent.
The government has attempted to counteract the pandemic’s impact with a fiscal stimulus in which thus far has amounted to $US48 billion. However, experts are suggesting the GDP will likely contract again in the third quarter, albeit at a slower rate, putting the economy formally in recession. Anwita Basu of Fitch Solutions, in comments to the Australian Financial Review, predicted a 4.5 percent contraction.
Amid warnings that Indonesia’s recovery could be the slowest in Southeast Asia, the finance ministry projected that the economy could shrink by 0.4 percent for the full year. The World Bank has predicted a far worse outcome: output could contract by as much as 3.5 per cent in 2020, a disastrous result for an emerging economy.
The government this month unveiled a $US40 billion debt monetisation scheme. Bank of Indonesia, the nation’s central bank, pledged to buy $US28 billion of government bonds while relinquishing interest payments. The bank has cut its key interest rates four times this year by a total of 100 basis points, in a drastic bid to promote economic growth.
Despite these measures, economists are urging Widodo’s government to further ramp up state spending to prevent a recession. “The economic performance will depend heavily on whether the government can accelerate spending to jack up growth,” Bank Central Asia economist David Sumual told the Jakarta Post last week Wednesday.
At the outset of the global downturn in March, Widodo announced a regulation that would waive a cap on a maximum budget deficit for three years. This allowed Bank Indonesia extraordinary powers to funnel huge sums of money into the financial sector. Following this aggressive intervention came a protracted series of stimulus packages, directed almost exclusively at bailing out the corporations and amounting to 15.7 percent of the total budget.
The government’s relentless drive to resume production, even as the pandemic ravages the population, is an expression of its desperation to prevent a liquidity crisis and economic collapse. In fact, its response to the pandemic, from the beginning, has been motivated solely by a concern over its impact on corporate profits.
The belated implementation of limited lockdown measures in April brought production across a range of industries to a grinding halt. These were largely confined to capital city Jakarta, where the transnational corporations are largely based.
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Japan’s economy watcher sentiment almost back to pre-pandemic level
Business sentiment among workers in Japan with jobs sensitive to economic trends in July almost returned to levels seen before the coronavirus outbreak, as social and economic activities gradually resumed, government data showed Tuesday.
The diffusion index of confidence among “economy watchers” such as taxi drivers and restaurant staff, released by the Cabinet Office, rose 2.3 points from June to 41.1, compared with 41.9 logged in January when the fallout from the virus outbreak in China was yet to be felt in Japan.
The reading in the reporting month increased for the third consecutive month after a record-low figure of 7.9 was marked in April, when a nationwide state of emergency was declared to prevent the virus spread, dealing a heavy blow to the world’s third-largest economy.
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As for the outlook, however, the economy watchers expressed a pessimistic view, with the diffusion index gauging business sentiment regarding the coming months decreasing 8.0 points to 36.0.
A government official told reporters that the outlook figure, down for the first time in three months, is believed to reflect a recent resurgence in infections seen across the country.
“We can see indications of a pickup from the outcome as economic activities have been partially lifted by the government’s support measures such as cash handouts and a subsidy campaign for tourists, while negative effects of the resurgence in virus cases appeared in the latter half of the month,” the official said.
In May, the government began delivering 100,000 yen ($942) each to 126 million residents in Japan and launched a subsidy campaign called “Go To Travel” in late July to boost the virus-hit domestic tourism industry.
But the travel promotion policy has drawn fire from the start amid concerns that it could further spread the virus infection.
A reading below 50 indicates that more respondents reported worsening conditions than improving ones.
The index on current conditions in June had logged the largest month-to-month rise of 23.3 points since comparable data became available in January 2002.
The Cabinet Office maintained its assessment after upgrading it for the second straight month in June, saying that while economic conditions remain severe due to the coronavirus pandemic, there are signs things are picking up.
A department store worker in the southwestern region of Kyushu was quoted as saying that sales were gradually recovering as customers increased from the previous month, but the number of elderly people visiting the store remained at a low level.
A fabricated-metal industry worker in the Kinki region in western Japan welcomed the fact that more auto plants were resuming operations, but said it would take time for related sectors to go above a profitable line of business.
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India’s economy unlikely to recover soon despite growing job numbers
India’s employment numbers are almost back at par with pre-lockdown levels after a sharp recovery in jobs since April. But most of the employment that has been restored is from the low-paying informal sector. As far as the better-paying jobs are concerned, the situation seems to be worsening.
According to Centre For Monitoring Indian Employment (CMIE) data, an estimated 121.5 million jobs were lost in April 2020. It recovered to 100.3 million in May and fell to 29.9 million in June.
July saw a further recovery in jobs and the number of jobs lost fell to 11 million. But there is a catch.
Though job recovery has been impressive in the past three months, it does not signal at a speedy economic recovery as better-paying jobs have become scarce in the wake of the financial crisis triggered by coronavirus pandemic.
Mahesh Vyas, MD and CEO, CMIE, opined in a recent article that India’s job revival is worrisome because the key driver of the economy — salaried jobs — has not recovered yet at par with informal jobs.
Vyas said the plight of salaried employees has worsened since the lockdown began, In April, more than 17.7 billion salaried jobs were lost in the country and the figure had increased to nearly 19 million in July.
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China: the bubble that never pops, by Thomas Orlik
Xi Jinping’s Belt and Road Initiative — launched in 2013 with the prosaic ambition of funding infrastructure projects within and outside of China — has attracted two main critiques. Some saw it as an attempt to build neocolonial influence across emerging markets as US power waned. Others saw the failure of specific projects as further evidence of economic over-reach, already widely associated with Chinese ghost towns and bridges to nowhere.
To Thomas Orlik, chief economist at Bloomberg Economics, these responses amount to an acute case of what he calls “sinophrenia” — a condition of modern commentary that combines the belief that China will imminently collapse with the belief that it is taking over the world. It may be the sign of a first-rate intelligence to hold two contradictory ideas in your mind at the same time. But Orlik argues that both views focus so intently on their own version of the future that they miss what exactly is happening in the present.
As a result, a lightly professorial “yes and no” tone pervades this wide-ranging and nuanced survey of China’s recent economic history which gently challenges the prevailing orthodoxy.
The book divides the country’s reform-driven history after the 1976 death of Mao Zedong into distinct cycles: the opening of the economy under Deng Xiaoping; the period from the crackdown after the 1989 Tiananmen demonstrations to the 1997 Asian financial crisis; and the changes associated with China’s 2001 entry into the World Trade Organization.
We are nearing the end of a fourth cycle, which began with infrastructure spending to counteract the effects of the 2008 crisis. The implication from these cycles is that China has demonstrated a continued ability to fend off crises, which casts doubt on fears of impending collapse. Orlik partly explains this resilience as the “advantage of backwardness” — China’s economy in the mid-20th century dramatically lagged behind many other large nations and had more room to rise. He also suggests the country’s policymakers are “more imaginative and flexible than their critics give them credit for”. They have “faced down” the Asian financial crisis and the crisis of 2008, stopped equity routs, and prevented capital outflows.
There is no shortage of pending challenges: an enriched middle class that may demand political liberalisation; the need to reform the state’s control of economic activity; runaway real estate prices. But this is a Leninist state, that can shift policy fast without meddlesome factional feuding (at least, without it in the open).
Orlik outlines several familiar ways in which China could continue to stave off crisis, including transitions to a more dynamic private sector, or to more service-driven economy, or by reducing export-dependency. More importantly, he develops detailed arguments that these transitions, among others, are more fully under way than is often acknowledged.
The strength of this book — and one that is even more valuable as US-China tensions rise — is its capacity to resist stridently ideological interpretations of the Chinese model. It is instead a history of crisis and response, in which policymakers are often seen as learning from earlier experiences. But the seeming clarity of China’s economic lessons may be a product of constraints on information and intellectual freedom that Orlik points to elsewhere. More deeply debated histories tend to divulge less clear-cut truths.
Moreover, the state’s control complicates the ability to identify economic trouble, such as rising unemployment, in the first place. If history is built only on crises that are able to smash through information constraints, the bar may be too high.
Lastly, the book provides strong evidence of the Chinese government’s competence and flexibility when faced with challenges. But it is not necessarily straightforward to conclude, as implied through learning from history, that the main goal of the individuals running the country is stability.