The gross domestic product (GDP), the broadest measure of goods and services produced, shrunk 5.32 percent year-on-year (yoy) in the second quarter, the steepest decline since the first quarter of 1999, Statistics Indonesia (BPS) announced on Wednesday.

All components except for net exports fell annually as the country was hit by the COVID-19 pandemic.

Household spending, which accounts for more than half of the GDP, fell 5.51 percent yoy in the second quarter, while investment, the second-largest contributor, contracted 8.61 percent. Exports and imports shrank by 11.66 percent and 16.97 percent, respectively, due to slowing global trade, but with imports dropping more than exports, trade had a positive impact on GDP in the second quarter.

Government spending, which is expected to anchor the economy and boost people's purchasing power amid cooling private-sector activity, plunged 6.9 percent during the period.

“Although we expect a recovery in the third quarter, the economy is at risk of recession if the government fails to ramp up spending and bolster household consumption,” Bank Central Asia (BCA) economist David Sumual told The Jakarta Post on Wednesday.

"The economic performance will depend heavily on whether the government can accelerate spending to jack up growth," he stressed.

The government, David said, should bolster spending on direct cash transfers for low-to-middle income earners and inject funds into infrastructure projects to stimulate the economy.

President Joko “Jokowi” Widodo’s administration has allocated Rp 695.2 trillion (US$47.5 billion) of the state budget to stimulate the economy and strengthen the country’s pandemic response, but slow disbursement due to red tape is expected to delay the impact on the economy.

The government has only realized Rp 145.4 trillion of the earmarked pandemic response spending so far, dominated by social aid and stimuli for micro, small and medium enterprises (MSMEs), while the disbursement of stimulus funds for health care and corporate financing, among other things, lagged.

Jokowi has repeatedly expressed disappointment in his Cabinet over the poor utilization of the COVID-19 emergency funds. He said on Monday that the ministries and government institutions lacked a sense of urgency amid the health crisis.

“The pace of economic recovery will depend heavily on how well the government controls the spread of COVID-19 in Indonesia and the effectiveness of the national economic recovery program going forward,” Bank Mandiri economist Andry Asmoro said.

He projected that the economy would shrink further in the third quarter, albeit at a slower pace than in the second quarter, which means Indonesia would fall into a recession.

A recession is typically defined as a year-on-year economic contraction in two consecutive quarters.

Andry said the economy could contract by 1 percent this year as the decline in activity in the first half was greater than previously anticipated.

Finance Minister Sri Mulyani Indrawati expects the economy to grow at no more than 0.5 percent or even contract further in the third quarter, while fourth-quarter GDP growth is projected to be near 3 percent, making for a full-year expansion of zero to 1 percent.

“The government uses its instruments, such as social aid and stimulus packages for MSMEs, so that they keep their workers, to boost people’s purchasing power while bolstering investment,” she said on Wednesday. “We keep guarding the economy, so that it keeps growing and stable.”

In overall, the GDP has contracted 1.26 percent in the first half compared to the same period of last year, according to BPS data.

The GDP report reflects the impact of widespread disruption to the economy as the government ordered the imposition of large-scale social restrictions (PSBB) in April and May to contain the coronavirus spread. The restrictions require people to work and study from home and not to congregate in houses of worship.

As a consequence, around 3.7 million individuals have lost their jobs so far this year, according to data from the National Development Planning Agency (Bappenas), a number that is expected to hit around 10 million by the end of the year.

Coordinating Economic Minister Airlangga Hartarto also said on Wednesday that the government was preparing new incentives in the form of working capital for 12 million MSMEs and financial support for workers.

Airlangga said the economy had bottomed out in the second quarter and may improve in the third quarter as the government reopened the economy.

“The improved economic performance since June may take a hit if [coronavirus] cases continue to rise and government spending remains sluggish,” said University of Indonesia economist Fithra Faisal. “The key is to control the pandemic and expedite stimulus spending.”

- Riska Rahman contributed to this story