A recession is when the gross domestic product (GDP) declines or real economic growth is negative for two quarters or more in one year. Recessions are often associated with falling prices (deflation) and rising prices sharply (inflation) in a process known as stagflation.
Definition of recession according to experts
1. NBER
The National Bureau of Economic Research explains that a recession is a significant reduction in economic activity spread throughout the economy. This recession can last more than a few months. This decline is reflected in real GDP, income, employment, industrial production, and wholesale-retail sales.
2. Forbes
Forbes defines a recession as a significant decline in economic activity that lasts for months or years.
Big Indonesian Dictionary (KBBI), the notion of a recession is sluggishness in trading activities, industry, and so on (as if they have stopped) or a decline (decrease, reduction) of trade (industry) activities.
Causes of Recession
What causes a recession? Experts have used many theories to reveal the occurrence of a recession, both in the economic, financial, and so on.
The following are some of the causes of recessions.
- There is a balance of production and consumption.
The balance between the two is the basis of economic growth. When production and consumption are out of balance, the business cycle suffers. On the other hand, if mass production is not followed by mass consumption, supplies will build up.
On the other hand, if production volumes are low and consumption volumes are high, there will be a shortage of domestic demand, so we have to depend on imports. This will cause the company’s profit to be lower and impact the weakening of the capital market.
- Economic Shock
Unforeseen events cause economic turmoil, such as natural disasters and terrorist attacks. The latest example is the Covid-19 Pandemic hitting all countries in the world.
- Structural changes in the industry
Structural changes in the industry give rise to problems such as a sharp and sustained spike in oil prices due to the geopolitical crisis can increase the overall cost of the economy, while new technologies can quickly render entire industries obsolete and, in both cases, trigger a recession.
- Oversupply
Companies tend to increase production in a good economy to meet consumer demand. However, as demand peaks and begins to decline, the excess unconsumed goods and services lead to a recession, with firms producing fewer and shrinking in size, while people lose purchasing power and consumption declines.
- Speculation
Generally, a recession forms when the price of something rises sharply due to speculation, market movements, or consumer confidence. Investors buy them in the hope of profiting from the rising price. However, when they started selling it, supply exceeded demand (meaning fewer new buyers), the price dropped, and the bubble burst. This happened with the Tulip in the 17th century and the housing market in 2008.
- Loss of confidence in investments or business
When consumers lose trust, they stop buying and become defensive. Finally, panic set in as the critical mass moved toward the exit. As a result, businesses post fewer job ads, and the economy creates fewer jobs.
Slow retail sales. Manufacturers need to be more responsive to falling orders, increasing unemployment. The federal government and central bank must intervene to restore confidence.
- The import value is far greater than the export value
In international trade, import and export activities are very rational. Apart from establishing economic cooperation, imports, and exports, among other things, help meet the needs of the people of the two countries.
Countries that lack raw materials because they cannot produce their products can import them from other countries. Conversely, surplus-producing countries can export these goods to countries that need them.
However, if exports and imports are unstable, it can affect the country’s economy. Imports that are much higher than exports pose a risk of a national budget deficit
Conditions experienced during a recession
- GDP has fallen.
- Economic activity stagnated, and businesses reduced their efforts to survive.
- Cuts at these companies will lead to layoffs and unemployment. Seeing other people laid off means those still working are afraid of losing their jobs, which causes a decrease in consumer spending and debt increases.
- The price of oil will not rise again but will fall.
- Many experts began to collapse because prices fell and export volumes fell.
- Other commodities such as pepper, coffee, tapioca, rattan, nickel ore, and bauxite also weakened slightly.
- The fall in oil prices hit the Indonesian economy hard
- Development funds that used to come from oil and gas revenues were minimal.
- Exports other than oil and gas were also hit and did not grow as expected. This is because they could not make up for losses caused by falling oil prices.
- The domestic industries affected include the textile, automotive, electronics, and construction industries.
How to prepare for a recession:
- Have extra income
- Do side jobs
- Re-identify daily expenses
- Keep learning to deal with change
- Focus on what you can control
- Focus on money, mindset, health
- Start living within your means
- Prioritize what you need, not what you want
- Prepare an emergency fund and insurance, especially for health
- Do not be in debt
(Nisa/UPTWeb)
