GDP Outlook – Q3 2020: Starting to Recover
03 November 2020
Riset
- The relaxation of large scale social distancing restrictions in several provinces had a positive impact on increasing mobility, further boosting economic activity. The brisker economic activity was also driven by the implementation of a fairly aggressive national economic recovery program (PEN), especially the disbursement of assistance via the social protection program that has been able to reduce household expenditures and increase household expenses.
- The people’s confidence in economic conditions remained weak as shown by the average of the consumer confidence index (CCI) in the 3rd quarter of 2020 of 72.9, lower than 76.6 in the 2nd quarter of 2020. The weakening of the CCI is mainly a reflection of limited job opportunities and the relatively slow recovery of economic conditions. Economic recovery will be slow as shown by the weak buying intentions index for all income groups. In the third quarter of 2020, the average buying intentions index stood at 158.36, lower than 168.0 in the previous quarter.
- Household consumption (HHC) slightly improved from the previous period but remained weak. The improvement in HHC was driven by better retail sales, as the average retail sales increased by 0.85% qoq in the 3rd quarter of 2020 although they still contracted compared to the previous year by -9.64% yoy. In addition, car sales increased sharply in the 3rd quarter of 2020 (+362.15% qoq) but still contracted compared to last year (-59.30% yoy). Weak household consumption was also reflected in the low inflation during 3rd quarter of 2020 where monthly deflation occurred for 3 consecutive months. On an annual basis inflation was recorded at 1.42% yoy (as of September 2020), lower than the target of 2% - 4%. Benign inflation owed to lower prices of volatile foods and ticket prices for air transport.
- Government spending increased sharply in the 3rd quarter of 2020 while government revenues still contracted. The increase in government spending was driven by the realization of the PEN program which reached IDR 304.63T or 43.8% of the IDR695.2T budget (as of 28 September 2020). This was dominated by social protection programs amounting to Rp150.86T or 62.34% of the Rp242.01T budget. Meanwhile, state revenues continued to contract for both tax revenues and non-tax revenues, in line with weak business activities of both MSMEs and corporations.
- Investment slightly improved compared to the previous quarter, driven by an increase in capital goods investment in the 3rd quarter of 2020 by 14.88% qoq or -24 .90% yoy. In addition, the realization of DDI and FDI also increased in Q3 2020 by 9.08% qoq and 8.72% qoq or 2.15% yoy and 5.27% yoy, respectively.
- Exports and Imports growth did not show a significant improvement in Q3 2020. This was commensurate with the weak demand in the manufacturing sector. Manufacturing loans grew more slowly in August 2020 by 0.15% yoy compared to 1.23% yoy in June 2020. The weak demand in the manufacturing sector was mirrored by Indonesia"s PMI which is still in the contractionary zone. The average PMI in the 3rd quarter of 2020 stood at 48.60, up from 34.44 in the 2nd quarter of 2020.
- Given this backdrop, we estimate that the Q3 2020 GDP growth will contract by -2.48% yoy. Economic recovery will depend on the people"s confidence to return to their pre-pandemic activities and should be supported by the availability of a safe Covid-19 vaccine and the effective implementation of the PEN program.