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Global geopolitical pressure and Indonesia's economic shield
The key to keeping Indonesia's economy resilient amid this year’s geopolitical tensions is its management of the pandemic.
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A woman buys vegetables at a stall in a traditional market in Jakarta. (Tempo/-)
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tatistics Indonesia (BPS) reported on May 9 that Indonesia’s annual economic growth as of the first quarter was 5.01 percent. Bank Indonesia (BI) announced in April that the consumer price index (CPI) was up 2.64 percent year-on-year in March. This first-quarter performance thus carried on the economic achievements of 2021, when economic growth was 3.7 percent, higher than the CPI of 1.9 percent that year.
This trend proves that Indonesia's economy can absorb increasing global inflation amid the rising geopolitical tension of warfare. More good news is that, like the annual growth in the third quarter of 2021, the growth of the manufacturing sector in the first quarter of 2022 was higher than the annual economic growth.
The manufacturing sector grew 3.68 percent in the third quarter of 2021, as compared to the 3.51 percent growth in the economy as a whole. In the first quarter of 2022, the manufacturing sector saw 5.07 percent growth, higher than the overall economy’s 5.01 percent growth.
At the beginning of the geopolitical tensions of 2022, most economists estimated that the prices of grain, wheat flour and fertilizer would increase sharply because both Ukraine and Russia were major producers of those products. As the conflict escalated, major automotive products and electronics were affected because Russia is a major producer of Integrated Circuits (ICs) or microchips, while Ukraine is a major producer of neon gas, which is vital in the production of silicon for ICs.
The geopolitical crisis will reduce the production of ICs and, therefore, automotive and electronic products. These declines will cause issues beyond the pandemic’s impacts. The ongoing global geopolitical instability will increase international logistical costs. Therefore, it will affect all sectors, from food products to trade services.
The geopolitical tensions of 2022 have also disrupted the whole global value chain (GVC). The global economy, which has declined in aggregate demand due to the pandemic, is now facing another challenge of scarcity in aggregate supply. The latter will push the global economic equilibrium to a new balance of lesser output but higher prices.
The global inflation rate will hit all countries through the increase of imported inflation, transmitted from the world's producer price index (PPI) to the domestic CPI. Figures from the first quarter of 2022 showed that the transmission power was still relatively low.
