INDONESIA experienced deflation of 0.37% in May 2025 on a monthly basis (month to month or mtm). This is the third time this year that deflation has occurred after January (-0.76%) and February (-0.48%).
This prolonged deflation could trigger a technical economic recession and a new wave of layoffs. If the low demand continues, then mass layoffs will be even more massive in the second semester of this year, which could trigger a technical recession.
A technical recession is a situation that occurs when a country’s Gross Domestic Product (GDP) or economic growth is below zero (0) or negative for two (2) consecutive quarters.
Economic growth in the second quarter of 2025 will again not reach 5%. Previously, economic growth slowed to 4.87% in the first quarter of 2025 (year on year or yoy). There are signs of slowing economic growth in the second quarter of 2025.
Prolonged deflation will make the economy challenging and there is the potential for mass layoffs. Perhaps it is not called a real crisis, because the turbulence is just a bit harsh, especially for the lower middle class. Mass layoffs could increase, the estimate is indeed above 80 thousand in 2025.
The Indonesian government must do something. This is because several sectors that are drivers of economic growth have experienced a decline. There must be an initiative to reduce the effects of globalization, such as: diversify export destination countries, destinations for products received outside the US market, and negotiate tariffs so that the impact on the country can be reduced.
It seems the six stimulus packages are enough to cushion the lower class, but not enough for the middle class. So, the stimulus needed is stimulus in the infrastructure and labor-intensive sectors, including additional stimulus for the industrial sector because that is what absorbs the most jobs. The government must be vigilant about deflation.
This deflation is a danger alarm for the Indonesian economy. Economic growth in the second quarter of 2025 is projected not to reach 5%. A prolonged deflation indicates that most people are holding back on spending. This makes the future economy more challenging.
This is not about a success in controlling inflation, but demand pull inflation is not moving up. This means that the population is large, but most are holding back on spending. Slow household consumption means that the future economy is more challenging.
The root of this problem is because there are not much jobs created. As a result, there is no increase in aggregate community income. What really happens is that layoffs increase. Because many are laid off, many people are holding back on purchases and if we look at them, they use their savings for survival. They make reserves to buy, but don’t spend a lot.
The government must move quickly to overcome this problem.
Because if not, the condition will worsen the common people. There must be an effort to take the initiative to reduce the detrimental effects.
