JAKARTA, INDONESIA (15 September 2020) — Indonesia’s economy is forecast to contract by 1.0% this year amid the coronavirus disease (COVID-19) pandemic before rebounding to 5.3% growth in 2021, according to a new report released by the Asian Development Bank (ADB) today.

The Asian Development Outlook (ADO) 2020 Update says the country’s economic recovery next year will be supported by the global economy and domestic reforms boosting investments. The contraction in 2020, which would be the first decline in the Indonesian economy since the Asian financial crisis of 1997–1998, is against a backdrop of overall negative growth projections in developing Asia, including Malaysia (-5.0%), the Philippines (-7.3%), and Thailand (-8.0%).

“Despite strong macroeconomic fundamentals, Indonesia can expect a difficult growth path for the rest of 2020, with much uncertainty surrounding the scope and trend of the pandemic in Indonesia,” said ADB Country Director for Indonesia Winfried Wicklein. “Moving forward, consistent and coordinated policy priorities that balance between protecting lives and livelihoods, and ensuring the safe restart of business activities, remain crucial to ensure a swift and inclusive recovery.”

Indonesia’s consumption contracted in the first half of 2020, as households cut spending and businesses postponed investments. Demand for the country’s exports shrank apace with lockdowns around the world. The government responded by delivering wide-ranging policy responses to mitigate the impacts of the pandemic, including income support for vulnerable households and workers, improvements in health care, and economic relief to businesses.

The report expects household spending to remain low in the near term, with social restrictions imposed to control the spread of the virus. As global and domestic demand stays weak in 2020, trade and investment activity will remain subdued. But the report projects a swift recovery, with pent-up domestic demand lifting the manufacturing purchasing managers’ index above the threshold of 50 in August. Confidence should also rise as the government provides financing support for investment and business operations.

With weak domestic demand in the near term, the inflation forecast for Indonesia this year is revised to an average of 2.0%, down from ADB’s April forecast of 3.0%. As household and business spending recovers in 2021, inflation is expected to rise to 2.8%. Meanwhile, the decline in capital goods imports has outpaced the contraction in tourism and commodities export earnings, with the current account deficit now set to narrow to an equivalent of 1.5% of gross domestic product in 2020.

“Under widespread uncertainty, risks to the outlook tilt to the downside,” said ADB Country Economist for Indonesia Emma Allen. “A resurgence of infections either locally or globally, which will lead to subdued consumer confidence in the long run, could delay the economic recovery. It is therefore critical that the government swiftly implement measures to contain the pandemic and promote economic recovery.”

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.

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