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View all search resultsThe long, winding road to economic recovery
Banks, instead of providing loans, have invested their cash in government bonds, which are safer but have lower returns.
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A
s people suffer the pain of the pandemic its economic shock, they hope the economic recovery will come soon. But this will depend on how the government responds to the spread of the virus and the weakening of the economy.
So far we’ve seen three types of government responses.
The first type is the China model, where a brutal lockdown was imposed soon after COVID-19 began to spread. The virus was quickly contained but at huge economic cost. The economy contracted by 6.8 percent in the first quarter but rapidly rebounded, growing 3.2 percent in the second quarter.
The second type of response is the United States model, where the federal government ignored the threat of virus and did not institute a nationally integrated and comprehensive response to the pandemic. President Donald Trump thought the virus would go away by itself, and he developed narratives that contradicted the opinions of health experts and scientists on the danger of the virus. The US has, as a result, suffered the highest number of cases and death in the world. Its economy is in tatters, having contracted by 5 percent in Q1 and by 33 percent in Q2, and unemployment is at a record high.
The third type of response is the Indonesian government model, consisting of denial and downplaying the impact of the pandemic early on, followed by half-hearted partial lockdowns with varying degrees of social restrictions. Of course, this has not worked. The virus has spread with ferocity, causing the nation’s gross domestic product (GDP) to contract by 5.3 percent in the second quarter, the first contraction in twenty-two years.
What was extraordinary about the second quarter GDP was that the GDP deflator fell by 1.9 percent. This is the first time in history that Indonesia has experienced a decline in its GDP deflator. This fall shows the extent of deflation in the economy.
Deflation can deter consumers from spending, especially from buying consumer durables and houses. And companies contemplating capital investment may prefer to remain on the sidelines until prices stop falling. According to economist Noriel Roubini (whose predictions of a financial crisis came true in 2008), the prolonged deflation could offset the impact of monetary stimulus, making monetary policy ineffective.
