Recession: Meaning, Causes and Effects on the Country

As with any business in general The country’s economy sometimes goes up and sometimes it decreases. When the economy is down, it’s called a recession. Find out what a recession is. Cause and effect on the country’s economy in the article below:

Understanding the Economic Recession

A recession is a significant decline in economic activity for two consecutive quarters. This condition often has deterioration in various economic indicators, such as negative economic growth. Increased number of unemployment and poverty and lower gross domestic product (GDP).

A recession is slightly different from a depression. Some literature says that an economic downturn is a recession. but more severe An economic downturn can be called a recession if economic growth declines in the -0.3 to -5.1 range and lasts for 18 months. It is different to a depression. An economic downturn occurs when economic growth is negative 14.7% to 38.1% and can last for more than 18 months.

simple example One of the highlights of the recession was during the COVID-19 outbreak in early 2020 to 2021. At that time, Indonesia’s annual economic growth was -2.07% and 3.69%, respectively, while the government had previously set growth targets. Economic Year 2020 at 5.3%

Cause of the recession

Recessions can be caused by many factors. In fact, recessions are infrequently caused by a number of interrelated factors. make it difficult to parse Here are some factors that can cause a recession.

1. Economic shock

The first cause of the recession was the economic shock. in the last two years The recession was caused by Covid-19 which suddenly hit people in Indonesia and around the world. This shock slowed economic growth. especially in the aviation and tourism sectors

However, in 2022 there is another economic panic that could trigger a recession. That is the war between Ukraine and Russia. This war has the potential to cause a recession. As Russia is one of the world’s largest oil producers, war can reduce oil supplies to other countries, and prices go up. An increase in the price of oil generally increases the price of other commodities such as fuel, export-import commodities, etc.

2. Inflation

Inflation is a common phenomenon. in the economy Well-controlled inflation signals the development of a country’s economy or society. An inflation rate that is too high will decrease people’s purchasing power.

As a result, people’s purchasing power is low. Business is sluggish because no one buys it. Taxes are reduced because unemployment increases (decrease tax per year) and no one buys products that are subject to VAT, etc.

3. Deflation

Excessive inflation is not good. Too much deflation is bad. contrary to inflation Deflation is a decrease in the price of a commodity at the same time. To some extent, deflation can mean a real increase in people’s purchasing power. But too much will reduce your income and passion for business. For example, during the last pandemic. Prices of multi-sector commodities in Indonesia fell by 1.28% and 1.44%.

4. Interest rate

Usually, an increase in inflation is followed by an increase in interest rates. The reason is that inflation often represents a high amount of money circulating in society. In order for people to buy their needs, the central bank will raise interest rates. The goal is that the money circulated in the community goes to banks and is not used for consumption.

However, if the interest rate hike is not correct It could exacerbate the recession. This is because an increase in interest rates equals an increase in the amount payable by the person borrowing from the bank.

5. The rupture of the asset bubble

The recession could be caused by the rupture of the asset bubble.bubble burst) In the capital markets, this has happened at least twice. It was during the US financial crisis of 2008 and the Great Depression that occurred in the same country from 1929-1930.

Simply put, the 2008 financial crisis in Uncle Sam’s country. Mortgages are disbursed to high-risk customers and their credit documents are resold to investors in the form of derivative investments. Not only banks are affected. but also other institutional investors and retail investors as a whole

The Great Depression of 1929-1930 was caused by a decline in the overall value of US stocks. The problem is that at that time, many investors used debt to buy stocks (margin), resulting in a drop in the share price. Investors panicked more than expected. in Indonesia The impact of the crisis can be seen in the delays in the construction of Kedung Zate Bandung and the decline in exports such as batik.

6. Technology development

In addition to the above 5 reasons Recession can also be triggered by technological developments. Because technological developments can lead to replacing humans with technology. So there is a possibility that the technology will advance. Unemployment will also increase.

The impact of the recession on the country

The effects of a recession on a country’s economy can occur simultaneously. Let’s start with the recession, which has had an impact on the decline in the company’s productivity. With the company’s productivity declining, so:

1. The company will make it more efficient by cutting salaries or the number of employees.
2. Machining will reduce people’s income.
3. People’s purchasing power has decreased.
4. The company’s income is still lower.
5. Declining corporate and social productivity leads to lower tax revenues.
6. This is because the government needs to remain active and stable. The government will inevitably increase both domestic and foreign debt.

In the case of the 1998 financial crisis, Indonesia’s recession spurred and exacerbated social and political instability.

Overview of the recession in Indonesia.

As a country with an open economy for exports and imports The Indonesian economy is easily affected by global economic volatility, in addition to COVID-19. Indonesia was more or less affected by the Great Depression of 1929-1930, and was hit by the 2008 US financial crisis.

However, the recession was not as severe as the 1998 financial crisis, also known as the 1997 Asian Financial Crisis, the crisis that began on July 2 in Thailand. It spread to Indonesia and South Korea the following month.

At that time, the Indonesian economy shrank for 1.5 years. Indonesia’s economic growth dropped to -13%. The exchange rate of the Rupiah to the US dollar from the initial $1 equals $2,500 to $1, equivalent to $16,000 in just a few months.

As a result, prices for basic goods rose, 16 banks were forced to close. Several banks were merged with Bank Mandiri Indonesia, with the help of the IMF. Bank Indonesia became an independent institution and of course President Suharto stepped down from the throne.