A recession is an economic downturn characterized by a significant decline in economic activity across multiple sectors of an economy. It is generally marked by a contraction in gross domestic product (GDP), which is the value of all goods and services produced within a country over a specific period.
Table of Contents
GDP itself can be interpreted as the economic activity of a country during a period. So, if a country experiences a continuous decline in economic activity for two periods, then the country can be said to be in a recession.
Several factors can contribute to the onset of a recession, including a decline in consumer and business confidence, reduced investment and spending, financial market turmoil, or external shocks such as natural disasters or global crises. Recessions can have wide-ranging effects on individuals, businesses, and governments, leading to job losses, decreased income, lower profits, and reduced government revenues.
Governments and central banks often implement various measures to mitigate the impact of recessions. These measures may include fiscal policies such as increased government spending or tax cuts to stimulate demand, monetary policies such as reducing interest rates to encourage borrowing and investment, and regulatory measures to stabilize financial markets.
Causes of an Economic Recession
There are various factors that trigger a recession in a country. The factors that cause a recession are as follows.
1. Inflation
Inflation is a condition of continuous increase in prices, both the prices of goods and services. This price increase has an impact on the weakening of people’s purchasing power which will be followed by a decrease in the production of goods and services.
If left unchecked for a long time, this will result in high unemployment due to mass layoffs, poverty, and a recession.
2. Excessive Deflation
Like inflation, deflation can also have a bad effect and trigger a recession. Deflation is a condition in which the price of goods and services falls from time to time which ultimately results in a decrease in wages paid.
Deflation is also characterized by a delay in the purchase of goods or services until the lowest price. This is of course very risky for business owners. Because, although people’s purchasing power is likely to increase, in fact, business owners have to reduce production costs which leads to the loss of a business.
If the community or business units stop carrying out economic activities such as spending their money, it is not impossible that the existing economic conditions will be damaged.
3. The Asset Bubble Burst
The next cause of a recession is the bursting of the asset bubble. This can happen when investors take rash steps.
For example, there is a massive purchase of shares and property with the assumption that the price will rise quickly. Then, when the economy is in a shaky state, they will roll over to sell it which results in panic selling and leads to a recession due to market crashes.
4. Sudden Economic Shock
Another trigger for a recession is a sudden economic shock. This is marked by a decrease in purchasing power caused by financial difficulties and other serious problems such as piles of debt.
The accumulated debt will affect the interest that needs to be paid and lead to the inability to pay it off or default.
5. Technological Development
A recession is an economic downturn that is not caused solely by the economic activity itself. Technological developments are also a factor in the recession.
This can happen because of a decrease in employment which is being replaced by leading technologies such as Artificial Intelligence (AI) and robots. As a result, employment will decrease drastically and make the unemployment rate increase.
6. Imbalance Between Production and Consumption
The imbalance between production and consumption is the next trigger. Goods and services that are produced in excess with reduced consumption or purchasing power can wreak havoc on producers.
This has led to massive imports, increased corporate spending, and reduced profits for domestic companies.
How to Prevent a Recession
Recession is a situation that threatens many sectors. However, this does not mean that an economic recession cannot be prevented. Here’s how to prevent a recession.
1. Massive spending by the government
The way to prevent a recession is to strengthen purchasing power. The strategy that can be applied is to spend massively so that the economic cycle does not stall and the business world is moved to be able to continue to invest.
2. MSME Assistance
Recession is a crisis that can occur in many sectors, one of which is MSMEs. By channeling assistance to MSMEs in the form of productive MSMEs and low-interest loans, it is hoped that the wheels of the economy can run well.
3. Attract Investor Confidence
In addition to the two things above, the way to prevent recession is to make effective policies that are expected to attract investors to invest in Indonesia. So, later can create a better economic turnaround.
Don’t Panic, Here’s How To Deal With An Economic Recession
The soaring word recession in various media and online platforms made people more restless and panic began to creep up on Indonesian people one by one. There is a lot of content circulating about how dire the situation would be if a recession coming.
However, we should be aware that not all the information circulating can be digested raw. Because, not a of the information actually scares without providing proper education, especially for the general public.
This phenomenon is commonly known as fear-mongering, which is an act in which certain individuals or groups deliberately take advantage of the vulnerability of others to something that is at risk. As a result, people who feel anxious or afraid will be more afraid which can lead to mental health disorders, such as depression.
Even though the recession is a word that has a negative connotation, there’s no need to panic. Here are some ways to manage money that you can do in the face of an economic recession.
1. Don’t be wasteful, try to save money
Buy necessities as needed and try to meet basic needs properly. This is so that the remaining funds can be allocated for other more important things such as paying off debt, saving or investing, and preparing an emergency fund.
2. Paying Off Existing Debt
Try to be more conservative about debt. Especially in debt for consumptive purposes. A healthy proportion of debt is under 30% of your monthly expenses. However, since you need to prepare yourself for a recession, it’s a good idea to change the proportion to a smaller one.
In addition, make sure the debts you have can be paid off immediately. You can start from debt with high interest. Because debt with high interest will greatly affect your cash flow.
3. Prepare Emergency Funds and Insurance
An emergency fund that needs to be prepared is ideally 3-6 months from the number of your monthly expenses. this is meant to be in case something bad happens during a recession.
Next up is insurance. Insurance is still needed, especially health insurance to minimize disruption of financial cash when suddenly large amounts of funds are needed for health problems.
4. Start Looking for Additional Income
Frugality can indeed help you in maintaining a healthy financial condition. However, it is better if you also have additional income so that the funds collected can meet sudden needs that may occur at any time.
5. Invest and Save
Like saving money and looking for additional income. Saving and investing in the face of a recession is equally important to strengthen your financial foundation. try to save a little more than usual, especially saving for an emergency fund.
6. Manage Financial Posts Effectively
In order to avoid waste, it would be better if you start managing financial posts, especially expenses. Separate the basic needs and wants.
The hope is that by managing this financial post you can be wiser in spending the money you have.
7. Applying for a Loan for Productive Debt
As mentioned earlier, one way that we can take to prepare ourselves for a recession is to look for additional income.
There are many ways you can do this. For example, by opening your own business. It doesn’t have to be with a lot of capital, as long as you are consistent and remain optimistic, any business can generate a decent monthly turnover.
7. Economic Growth Declines For Two Consecutive Quarters
One indication of a recession is the decline in economic growth for two consecutive quarters, which is judged by the weakening of a country’s Gross Domestic Product (GDP).
8. Import Value is Greater Than Export
Another indication of a recession is that the value of a country’s imports is greater than its exports. This can have an effect on the state budget deficit and a decrease in national income.
9. High Unemployment Rate
The high unemployment rate of a country can indicate that country is experiencing a recession. Because labor has an important role in the economic cycle of a country.
If the unemployment rate increases continuously, this will result in an increase in the crime rate.
Broadly speaking, a recession is a situation that arises due to various factors. For example, the financial crisis, making wrong economic decisions, supply chain disruptions, external trade disruptions, the bursting of economic bubbles, to factors beyond human control such as natural disasters or pandemics.
The Impact of the Economic Recession
Read Also : The Issue of Sex Recession is in the Spotlight, Here Are 4 Countries That Experienced It
The impact of a recession is an effect that arises and affects several parties bringing an impact on governments, companies, and workers.
1. The Impact of the Economic Recession on Governance
The economic recession had a fairly heavy impact on the government. When this condition occurs, of course, the unemployment rate will increase and the government is required to create as many jobs as possible. As a result, loans to foreign banks skyrocketed.
The recession also makes tax and non-tax revenues low. This is due to the deteriorating financial condition of the community and falling property prices. Thus, the amount of VAT (Value Added Tax) that enters the state treasury is less.
On the other hand, the government also continues to be encouraged to carry out development in the government sector. One of them is to ensure the welfare of society. With all the existing demands and declining tax revenue, the country has a budget deficit and government debt is higher.
2. The Impact of the Economic Recession on Companies
A recession is an economic condition that can make a company go bankrupt. This is due to the decline in people’s purchasing power which has an impact on the decline in company income and threatens cash flow.
In the end, the company will cut operational costs and close the business areas that are less profitable, thus making tough decisions to make employee efficiency (PHK).
3. The Impact of the Economic Recession on Workers
The impact of the recession is an impact that is not only felt by the government and companies but workers are also affected.
Closed business areas and employee efficiency measures to reduce operational costs have caused many people to lose their jobs due to layoffs. Workers who are not affected by layoffs are also harmed by deductions from their wages.
This is the driving force for social instability, growing inequality everywhere, and a high crime rate.
FAQ
What happens in a recession?
In a recession, several things happen:
1. Economic activity declines
2. Job Losses increase
3. Reduce consumer spending
4. Business profits decrease
What is a recession vs inflation?
A recession is an economic downturn marked by a significant decline in economic activity, whereas inflation refers to a sustained increase in the general price level of goods and services over time.
Is a recession good or bad?
A recession is generally seen as bad because it leads to negative economic impacts like job losses and reduced growth. However, some argue that recessions can correct inefficiencies and foster long-term growth if managed well with appropriate policies.
