The COVID-19 pandemic has made us all suffer. Despite ongoing efforts to contain it, the virus continues its destructive march on us. However, Humans have always been resilient, especially when dealing with pestilence. We will survive the pandemic but nothing comes without a price. Our efforts in containing the virus through proven public health measures have severely stalled the world economy. All factors of production have been impacted. As a result, the contagion of economic recession to world economies is now inevitable.

Approximately a week ago when I casually scroll my Facebook newsfeed, I read an article shared by a friend of mine. The title reads: “Japan just fell into recession, and much worse could be on the way”. A viral infection of the economic recession has started, and patient zero is Japan. Although Japan has a relatively low number of COVID-19 patients compared to other developed countries, Japan’s fall into economic recession was predictable because of its vulnerable fast-shrinking economy. Now, other countries in the world are haunted by the fact that their country may follow Japan’s path into recession. This fear then leads several world leaders in making a hasty decision in opening the economy and letting the suffering economy room to breathe.

We are currently not anywhere near the golden window of efficient implementation of physical distancing. World leaders have missed the perfect time in containing the virus where it is still in its infancy. The less costly and most effective time to deal with the virus has left us all. Now, further alonng the virus’ destructive trajectory, because it is now hard to lower the pandemic’s economic cost and predict its path. What lies ahead is uncharted land, and it is advisable to proceed with the utmost caution and preparation.

Buckle Up!

Preparing for what lies ahead, we need to know how severe the economic recession will hit Indonesia in the foreseeable future. Currently, economists recognise 3 basic recession characteristics that are represented by several graphs that economists call “shock-geometry”. Those geometries are shaped similar to the letters V, U, and L, which represent their recession recovery graph. To illustrate the “shock-geometry”, here is a figure to show how three different countries react to the economic recession caused by the 2008 financial crisis.

To paint a clearer picture, below are the explanations for the “shock-geometry” as quoted from a Harvard Business Review article by Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz:

• V-shape. In 2008, Canada avoided a banking crisis: Credit continued to flow, and capital formation was not as significantly disrupted. Avoiding a deeper collapse has helped them keep their labour in place while preventing skill decay. GDP dropped but substantially climbed back to its pre-crisis path. This is typical of a classic “V-shape” shock, where output is displaced but growth eventually rebounds to its old path.

• U-shape. The United States is a classic “U-shape”, which is a much more costly version than Canada’s V-shape. Growth dropped and never rebounded to its pre-crisis path. Note that the growth rate recovered (the slopes are the same), but the gap between the old and new remains large. Moreover, as the recession dragged on, it did more damage to the labour supply and productivity.

• L-shape. Greece is the third example and by far the worst shape because the country never recovered its prior output path. Moreover, their growth rate has declined. The distance between the old and new is widening, with lost output continuously growing. This means the crisis has left lasting structural damage to the supply side. Because of it, Greece can be seen as an example of an L-shape, which is by far the most destructive.

Mass Increase in Labour Supply

The driving forces of the 2008 global financial crisis came from the stagnation of credit flow. When credit flow stagnates, businesses are unable to utilize it to grow thus stalling the economy. If the supply side gets heavily disrupted from the shock, there will be massive labour lay off and economic productivity will be lowered. We can observe the same phenomenon happening in the aftermath of the 2008 global financial crisis. At that time, even the “too big to fail” firms are forced to lay off their loyal workers as a result of the crisis.

Today in the COVID-19 era, the same pattern is occurring. A mass influx of productive workers re-enters the job market, causing a substantial escalation in the labour supply. As many as 1.6 million Indonesian workers are laid off as of April 13, 2020. That is only the official number reported by the Ministry of Manpower, nobody knows the exact number of unemployment caused by SMEs. Current total estimates by the Indonesian Trade Office (KADIN) range from 15 to 40 million layoffs. Moreover, most of the Indonesian workforce came from medium, small and micro-enterprises, which may skew the reported data’s standard errors.

In Preparation For a Shocking Truth

Although the same pattern of massive unemployment is occurring, the shock did not come only from the supply side. The demand side is also affected as heavily, this is a side-effect of the large-scale social distancing policy. Not only that, but failure on implementing proper virus countermeasures also aggravates the pain even further. Recent literature research by Rio-Chanona et al. (2020) makes it clear that the current crisis and previous epidemics influence patterns of consumer spending. But, whether it is only causing short-term demand reduction of postponed expenses or if it is permanent remains unclear according to the research.

One thing is for sure, in Indonesia, the demand for goods and services is still there, and the economy won't suffer from an L-shaped recovery. Why am I able to make such a bold claim? Because based on the recent phenomenon that we are observing right now. People are still crowding up in traditional markets, malls, and even department stores despite efforts made by the government to prevent such things from happening. President Joko Widodo is also currently planning to slowly open up the economy and “make peace” with the virus despite COVID-19’s unwillingness to cooperate. Because of this recent development on pent-up demand and the Indonesian government's effort to recover the economy, we can rule out the possibility of an L-shaped recovery. I am confident that Indonesia will only experience a V or U shape recovery from the COVID-19 shock.

However, I suggest that we should not cheer for this “achievement”. V, U, and even L-shaped recovery can all happen. Moreover, the COVID-19 pandemic is still here and there is no sign of a viable and effective vaccine yet. It is really hard to predict exactly how deep the V-shape will be. Neither we can predict how the U-shape will continue tracing a different path. It is also unknown whether or not the U-shape will recover itself back to the old trendline. The future of Indonesian economic recovery all depends on how the government formulate and executes its policies. The risks are real, starting from the possibility of the increase in non-performing loans that could start liquidity issues in Banks to the possibility of a stall in the real economy.

If the Indonesian government can present a better policy formulation that will benefit both the economy and public welfare, we all can expect a V-shaped recovery rather than a full-blown U-shaped recovery in the Indonesian economy.

Author’s Note:

The content of this article has been updated to adjust for editorial mistakes and grammatical errors.