Indonesia’s GDP to stagnate as global economy sees worst recession in 80 years: World Bank

Posted by on 10 Juni 2020


Indonesia’s gross domestic product (GDP) will grow at zero percent this year as the global economy is expected to see its deepest downturn since the Second World War, the World Bank has forecast.

Southeast Asia’s biggest economy will see its weakest economic performance since the 1998 Asian financial crisis as the COVID-19 crisis strikes “a devastating blow to an already-fragile” global economy, the Washington, DC-based development bank said in its latest Global Economic Prospect report.

“Necessary but economically costly lockdowns have become widespread and resulted in a sharp contraction of economic activity, while an abrupt tightening of global financial conditions has led to sizable capital outflows,” it said in the report.

“While not contractions, Indonesia’s growth rate would nevertheless be 5.1 percentage points lower than January forecasts,” the World Bank said. “Regional commodity exporters [including Indonesia] were also hit by a steep decline in commodity prices.”

The country’s economy is projected to rebound sharply and record 4.8 percent growth in 2021, although still lower than the World Bank’s earlier projection in January.

The coronavirus outbreak has disrupted economic activity throughout the archipelago as the government has called on citizens to implement physical-distancing measures to contain the spread of the coronavirus, forcing offices, factories, shops and schools to shut down. Four provinces and 11 regencies/cities have imposed large scale social restrictions (PSBB), which have forced non-essential businesses to close.

The government expects this year’s economic growth to reach 2.3 percent under the baseline scenario, or to contract by 0.4 percent under the worst-case scenario as consumer spending and investment dry up amid the pandemic. Indonesia’s economy grew by 2.97 percent in the first quarter, the slowest pace in 19 years.

Senior World Bank economist for Indonesia Ralph van Doorn said earlier this month that Indonesia’s economy might shrink 3.5 percent this year should the PSBB imposed by several regional administrations last for four months, according to the institution’s worst-case projection.

“[The zero percent growth in the baseline scenario] assumes two months of large-scale social restrictions and takes into account a severe global economic slowdown and a very big drop in commodity prices, all of which will have an effect on Indonesia’s economy,” Van Doorn told reporters in a livestreamed news conference.

“We expect private consumption to slow down due to job losses and a decline in consumer confidence. We also expect a slowdown in investment growth because of weaker economic activity and lower commodity prices.”

Domestic consumer spending expanded just 2.84 percent year-on-year (yoy) in the first quarter from 5.01 percent during the same period last year.

In the case of the global economy, the World Bank now forecasts it will shrink by 5.2 percent, the worst in 80 years, as the coronavirus pandemic inflicts a “swift and massive shock” on the economy.

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank Group vice president for equitable growth, finance and institutions Ceyla Pazarbasioglu, as reported by Agence France-Presse.

The depth of the crisis will drive 70 to 100 million people into extreme poverty – worse than the prior estimate of 60 million, she told reporters on Monday.

Under the worst-case scenario, the global recession could mean a contraction of 8 percent, according to the report.

The development lender projects a rebound for 2021 with the global economy growing by as much as 4.2 percent.

“The pandemic will likely further slow potential growth in the [East Asia and Pacific] region by weakening investment and the supply chains that have been an important conduit for productivity gains over the last decade,” the report read.

“The regional outlook will significantly deteriorate if global trade tensions re-escalate.”

Advanced economies, including the United States and the eurozone, are projected to contract by 7 percent this year, while emerging market and developing economies will shrink by 2.5 percent.

Meanwhile, the economy in China, Indonesia’s largest trading partner and the country where the outbreak began, is expected to grow by 1 percent this year.