The second quarter of 2016 has just began, and experts and academicians alike have made forecasts on the potential growth in macroeconomic sector. These forecasts are important recommendation for future decision making and evaluation. On 6 April 2016, Institute for Economic and Social Research, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI), held a forum to discuss about the forecasts of LPEM and Asian Development Bank (ADB). Presenting at the event in Salemba, FEB UI, was Priasto Aji (ADB) and Febrio Kacaribu ( LPEM FEB UI).
Priasto Aji began his presentation by showing the slowing down of growth in developing Asia from 5.9% last year to 5.7% in 2016. Growth in industrial economies are not improving this year, as the softening growth in People’s Republic of China (RPC) of 6.5% in 2016 and 6.3% in 2017 highlights the need of reforms from the supply side. Required supply-side reforms, such as effective capital investment and lessen misallocation of factor, should aim to boost labor productivity in order to achieve Asia’s potential growth. In his presentation, Aji emphasized the possible and existing risks imposed from increases in US interest rate and market volatility, the moderation in PRC’s growth, and the producer price deflation. While US interest rate and market volatility always affect the economy worldwide, in 2016 the PRC’s growth has impacted the global growth, Japan’s growth, and the rest of developing Asia. The producer price deflation is experienced by many Asian countries, especially as the labor market rigidity increases in most countries.
In the context of Indonesia, Aji underlined the urgency to address skills shortage in labor markets. According to Statistics Indonesia 2015, as per August 2015, 52% of the employed population are under-qualified for their jobs while only 40% of the employed population are exactly well matched. This condition can inhibit productive work and decrease the speed of transitioning between activities which add more value. Therefore, more and better investment in education, especially to the quality and improvement of the link and match concept implementation, are necessary in the coming year.
GDP growth in Indonesia had been affected by the slowing down of household consumption as it softens to 4.8% in 2015. In the coming years of 2016 and 2017, however, the growth will be boosted by private consumption and investment. Aji mentions the GDP growth in 2016 will reach 5.2% and 5.5% in 2017. This shows the importance of encouraging participation from private sector in investment to ensure the sustainability of the growth.
Febrio Kacaribu began his presentation by listing the important macroeconomic indicators that have the highest predicting power from the first quarter of 2000 to the second quarter of 2015, such as imports of consumer goods, US GDP, and sales of motor vehicle. He then highlights the employment trends in Indonesia, which complement the first presentation. Unemployment rate increased in the latest data of August 2015 as the economy improved and more people decided to go to school instead of working. As less people are choosing not to be in the labor force for taking care of family and going to school instead, future labor force can be expected to have better skill. However, to avoid further mismatched as mentioned in previous presentation, suitable policy should be implemented. Furthermore, labor intensive industries are also highlighted as the slowing down of employment rate is not a good sign to the economy. Most factories from this sector are moving to other countries, such as Vietnam, due to less rigid labor market. Kacaribu mentioned the possibility of e-commerce as an alternative to the changing structure in the industry.
Kacaribu then presented the forecast for external balance. Exports are expected to slow down at a slower pace than imports until mid-2016. By that time, GDP starts to pick up slightly and bring the trade balance back to its negative territory. Furthermore, volatility in the global financial market is still lingering. The government of Indonesia should prepare to take advantage from low interest rate regimes in US, EU, Japan, which can lead to capital inflow as occurring in 2009. Headline inflation for 2016 is forecasted around 5%; however, due to the impact of decreasing oil price fading, the inflation could be higher than forecasted in 2016.
As sectoral growth forecasts were presented, the oil and gas sector remains to have negative growth while cement, plantation, sea ports and transportation shown decline in growth. Property industry soars in growth but should be paid attention to as it does not give the equal impact to the overall economic growth and produced empty houses and apartments instead. Automotive industry also increases in growth and it is expected to bring more small-sized city cars to Indonesia. Meanwhile, telecommunication industry is forecasted to have negative growth although it should be realized that the indicator used in this forecast is only from the sales of two communication providers.