Recently, the United States Central Bank, The Federal Reserve (The Fed), raised its benchmark interest rate by 75 basis points or 0.75 percent to 1.5-1.75 percent. This move was taken to reduce high inflation and restore price stability. However, this policy is also seen as potentially triggering a recession in the U.S. How might this situation arise, and what are its implications for Indonesia? Let’s explore further.
What is a Recession?
An economic recession is a significant decline in economic activity that lasts for several months or even years. Common indicators of a recession include negative gross domestic product (GDP) growth, rising unemployment rates, a drop in retail sales, and a decrease in income and manufacturing output. According to economist Julius Shiskin, a recession can be defined as a decline in GDP for two consecutive quarters. This indicates that the economy is experiencing serious underlying issues.
Causes of Recession
Several factors can trigger a recession, one of which is inflation. High and uncontrolled inflation can lead to a recession because it erodes purchasing power. Additionally, asset bubbles are another contributing factor. When investors become overly optimistic and inflate stock or real estate markets, the bursting of these bubbles can lead to panic and market collapse.
Other factors include sudden economic shocks, such as unmanageable debt burdens for individuals or companies. Technology can also be a cause, particularly if technological revolutions lead to widespread job losses, as is feared with the advancement of Artificial Intelligence (AI) and robotics.
Impact of a U.S. Recession on Indonesia
A recession in the United States will undoubtedly have repercussions on the global economy, including Indonesia. Chief Economist at Bank Central Asia (BCA), David Sumual, mentioned that the likelihood of the U.S. experiencing a recession is very high and could happen in 2023. Should the U.S. enter a recession, foreign capital flows from Indonesia are likely to exit, potentially weakening the rupiah and disrupting the country’s foreign exchange reserves.
Moreover, Indonesia's export-import activities could also be affected. However, David Sumual explained that the impact on Indonesia might not be too severe because the proportion of exports and imports in Indonesia's economic growth is smaller compared to household consumption.
Steps to Mitigate the Impact of a Recession
To anticipate the potential impacts of a U.S. recession, the Indonesian government needs to strengthen the domestic economy. David Sumual suggests that the government should maintain the stability of food supplies to curb inflation and protect consumer purchasing power. Additionally, Bank Indonesia may consider raising its benchmark interest rate in the second half or third quarter of 2022 in response to the Fed’s aggressive policies.
Director of the Center for Economic and Law Studies (Celios), Bhima Yudhistira, also highlighted the potential weakening of the rupiah and rising inflation due to global conditions. Although the increase in import costs has not been deeply felt yet, if this situation continues, consumers will eventually bear the brunt.
The turmoil caused by a U.S. recession will undoubtedly have an impact on Indonesia, particularly in the export-import sector and the stability of the rupiah. However, with the right measures, Indonesia can minimize the negative effects of this global recession and maintain stable economic growth. The government needs to focus on strengthening the domestic economy and preserving consumer purchasing power so that the impact of the U.S. recession is not strongly felt in Indonesia.
