The 2020 Economy and Shadow of Recession from Trade War

Writer: Sorta Tobing

Editor: Sorta Tobing

13/8/2019, 12.12 WIB

Indonesia has not been able to take advantage of the US-China trade war. Recession is likely to occur and will spread faster than the 1998 crisis.

Telaah - Efek Perang Dagang terhadap Ekonomi Dunia Somsuk
An increasingly heated trade war between the US and China overshadows prospects for global economic growth in 2020.

Indonesia’s economic figures in the first half of 2019 are not very encouraging. The economic growth target of 5.3 percent was unachievable in the last two quarters, as well as tax revenue and state spending. Rupiah and inflation are still within this year’s state budget (APBN) target.

Most recently, Bank Indonesia recorded a current account deficit (CAD) of US$ 8.4 billion in the second quarter of 2019. It reached three percent of the Gross Domestic Product (GDP), the highest CAD limit that the government has projected in the range of 2.5-3 percent of the 2019 GDP.

According to the central bank, CAD is high because of the seasonal behavior of dividend repatriation, payment of the foreign debt, and global economic conditions. The latter makes commodity prices fall and Indonesia’s export performance deteriorates.

Vice President Jusuf Kalla (JK) previously said the government was slow in making policies to anticipate the development of the world economy, causing domestic industries to lag behind other Southeast Asian countries.

As a result, when there was a trade war between the US and China, Indonesia experienced difficulties in taking advantage. “We are late in making bilateral and multilateral agreements with several countries, such as the US. Vietnam has already extended the generalized system of preferences (GSP) with them,” he said last Wednesday (8/7), as quoted by Antara.

Because of the trade agreement, Vietnam was able to maintain its exports. The country’s economy strengthened, with an estimated growth of 6.6 percent this year, according to World Bank data. This is different from Indonesia, which is likely to only survive at 5.2 percent.

The escalation of the trade war has made many countries nervous. Moreover, US President Donald Trump plans to raise tariffs by 10 percent for incoming Chinese products worth US$ 300 billion. This rule will take effect from September 2019.

Trump made a similar move last June when he did not reach an agreement with China. Based on research by Fitch Ratings and Oxford Economics, Trump’s protectionist measures will have a significant impact on the global economy. Mexico will be the most affected country. Its GDP growth is predicted to decrease by 0.25 percent in 2020.

China becomes the third country with the eroded GDP, while Indonesia is in the top 10. The following Databoks chart summarises the results of the research.

The impact of the trade war has also reduced the export performance of many countries. Based on the 2019 Institute for Development of Economics and Finance (INDEF) Mid Year Study Book, Indonesia’s exports are predicted to be minus 0.24 percent by the end of 2019.

Besides Indonesia, exports of European countries and Japan are also minus 0.92 percent, same as India and Africa. However, as shown in the Databoks chart below, exports of several countries in Southeast Asia remained positive, such as Vietnam, Malaysia, and Singapore, and Thailand.

The Potential of Textile and Leather Products

INDEF Economist Bhima Yudhistira said the economic outlook for next year is still gloomy. Investment performance and domestic exports will tend to decline. The consumption of a middle and upper-class household is also stagnant. “I see it’s slowing down,” he told on Monday (8/12).

The price of commodities, which are Indonesia’s leading exports, is in the reverse direction but will be very slow as triggered by low global demand. Export-oriented manufacturing industries are also affected. “But the main factor is because it cannot compete with other countries, such as Vietnam for electronics and automotive products, as well as Bangladesh and Sri Lanka,” Bhima said.

Based on the results of the INDEF simulation published last week, the situation of the trade war could increase exports of textiles and domestic leather products. Indonesian textile export products to the US could fill the void of the Chinese market affected by rising import duties.

Moreover, Indonesia still enjoys GSP facilities or relief of import duties for textile and apparel products. Similarly, with leather products, the market to the US is very large. “This country benefits from low wages and abundant raw materials,” he said.

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