MACROECONOMIC ANALYSIS SERIES: BI Board of Governor Meeting, August 2020

Unsurprisingly, Covid-19 heavily impacted on Indonesia economic growth as the outbreak creates widespread disruptions in all aspects of the economy. The GDP growth sharply contracted by -5.32% (yoy) in the second quarter of 2020, marked as the worst plunge since the 1998 Asian Financial Crisis. Several key economic-driven sectors such as manufacture, wholesale and retail trade, construction, transportation, and accommodation have been hit the hardest as a consequence of the social restriction policies to curb the virus spread. The economic downturn was also fully reflected in the expenditure side, where negative growth was seen across all GDP components. Household consumption and investment dropped by -5.51% and -8.61% (yoy), respectively. Although the probability of slower economic activity in Q3-2020 is inevitable since the business cannot operate at full capacity and lower sales are preventing full economic recovery, the government needs to stay vigilant and focus on avoiding further economic
deterioration. Meanwhile, low inflation persists, and there is even a possibility of deflation in the upcoming months as precautionary saving among middle upper-class income group is likely to play a lasting role, leading to a low level of aggregate consumption.

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