The National Bureau of Economic Research (NBER) defines a recession as a situation where there is a significant decline in economic activity and lasts for several months continuously. When a recession occurs, a country's economic growth can fall to 0 percent or minus if it is in bad condition.

This results in a decline in five economic indicators, namely Gross Domestic Product (GDP), income, employment, manufacturing, and retail sales. This condition, also known as economic downturn, can occur in every country, including Indonesia.

Based on the presentation once delivered by the Executive Director of the Department of Economic and Monetary Policy of Bank Indonesia (BI) Endy Dwi Tjahjana, Indonesia's economic prospects in 2020 are in the range of 5.1 to 5.5 percent of GDP with inflation of around 3.1 percent. Meanwhile, the Indonesian Minister of Finance Sri Mulyani in various recent news reports stated that the COVID-19 outbreak has made the Indonesian economy experience difficulties.

Causes of Economic Recession

The government estimates economic growth in 2020 at around 2.35 percent. The worst case scenario is around -0.4 percent. Sri Mulyani Indrawati explained that Indonesia's future economic growth depends on the extent of the impact of the COVID-19 outbreak in the country. If the impact of the outbreak worsens, the government is worried about a recession.

In addition to the COVID-19 outbreak, there are other sources that could cause a potential recession in Indonesia. First, the trade sector. The trade war phenomenon between the United States (US) and China has affected all countries in the world. In Indonesia, the trade war between the two major countries has caused exports from Indonesia to decline. While on the other hand, exports are one of the drivers of domestic economic growth.

Second, the energy sector. Based on a study by the Institute for Development of Economics and Finance (INDEF), the prices of Brent crude oil and West Texas Intermediate (WTI) are expected to plummet in 2020. This has slowed down demand for energy. Third, the slowdown in the Chinese economy where in the third quarter of 2019, the Chinese economy slowed down by 6.2 percent.

The fourth source of potential recession is the spike in debt. The INDEF study also stated that the ratio of government debt to GDP in a number of countries tends to increase. In Indonesia, Finance Minister Sri Mulyani in early 2020 stated that the debt ratio was still maintained in the safe category below 30 percent, which is 29.8 percent of GDP.

While other countries, such as the Philippines, Singapore, and Japan, have debt-to-GDP ratios of more than 30 percent, some even exceeding 50 percent. The fifth source is financial sector risk. One of them is triggered by the large number of Chinese bonds and the potential for a US crisis. Long-term bond yields are lower than short-term ones.

Initial Steps to Prevent Recession

Recession is a condition that can affect several aspects, one of which is a decline in investment. The decline in investment will have an impact on the loss of jobs which then triggers significant layoffs. The production of goods or services also declines, thus reducing a country's GDP.

The effects of the economic recession also spread to bank credit jams, inflation that is difficult to control, and the emergence of deflation. The trade balance also has the potential to be negative and affect foreign exchange reserves. Purchasing power and business in a country also weaken.

With global conditions that are very uncertain, coupled with the Covid-19 outbreak that has hit the world, Indonesia needs to be aware of the potential for a recession. Still based on INDEF's presentation, the government must take steps to prevent a recession. First, strengthen fiscal stimulus by facilitating tax exemptions for a certain period of time and tax relief. This step is also required to protect middle and small companies.

Next, tighten supervision of corporations and financial institutions. This step is important to ensure the suppression of the risk of default. Stimulus for the lower middle class is needed, such as increasing Non-Taxable Income and not increasing certain contributions. This is so that the quality of consumption of lower middle class households continues to grow and is maintained. If consumption continues to grow, the economy will also experience growth.

The next step that the government must take is to improve political and security stability and expand exports by increasing promotion and market diversification. The domestic market also needs to be protected by ensuring that producers can provide most of the needs of domestic goods and services. The government also feels the need to strengthen the digital economy considering the market reach is domestic and not so affected by global pressure.

How to Deal with a Recession

So, how do we as individuals respond to this? One way is through investment. There are a number of stable investments if a recession occurs that can be chosen.

  • Investment

First, gold. Gold is a safe haven when the economy slows down. When inflation rises, the price of gold also rises. Gold investment offers ease in management, liquidation, and buying and selling. Second, Government Securities (SBN) issued by the government. The value and interest in SBN investments are guaranteed by the government. This can reduce investment risk to a minimum level.

Examples of SBN products are Retail Government Bonds (ORI), Retail Savings Bonds (SBR), Savings Rates, and Retail Rates. These investment instruments can be accessed by the public through agents, such as securities companies, fintech, and banks. Third, deposits. Deposits can also be an investment option. This is because when a recession occurs, deposits tend to be safe.

Fourth, forex trading investment that holds the potential for large profits because it moves in two directions, namely it can buy or sell. As a form of investment, forex trading provides ease in its management. You can get unlimited profits, flexible trading time, and can be done anytime. Yes, with the GICTrade platform that can be used via smartphone, you can make forex trading investments much easier and only need capital of IDR 2 million to start investing. Fun, right?

Fifth, the US dollar. The currency of Uncle Sam's country is a stable currency compared to other currencies in the world. That is considering that the US is also the largest economy in the world. This currency is also the main currency in international trade. The form of investment can be in the form of dollar deposits or dollar money market mutual funds.

  • Financial Planning

In addition to investment, one also needs to think about emergency funds. When a country experiences a recession, the impact is layoffs, personal business bankruptcy, or a sharp decline in income. Emergency funds should be prepared to finance life when a recession occurs. Workers also need to strengthen their profiles on various job search sites. This can be done by asking for recommendations from superiors at the office.

Training and certification programs according to the field of work can also be pursued to develop skills. Meanwhile, for business people, business diversification is important to face the recession. If a recession occurs and makes one type of business go bankrupt, there are still other types of businesses that can be fought for. Debt repayment planning is also an important effort when facing the risk of recession.

The method is with a debt ladder or debt snowball. Debt ladder prioritizes debt based on interest rates. While debt snowball uses a method of paying the debt with the lowest amount. In facing a potential recession, changing lifestyle is also important. Start by setting aside various short-term needs that are unnecessary and not urgent, such as replacing an old motorbike or car by buying a new one.

Economic recession is a risk that can happen at any time and needs to be anticipated. Thus, it is better to divert funds for such needs to other sectors that can support long-term life to face a potential recession.

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