As the world is recovering from the global outbreak of COVID-19, the ongoing war between Russia and Ukraine leads to a murky economic outlook. As reported by DW, the International Monetary Fund (IMF) warns of an impending global recession caused by the risks to the global economy. IMF Chief Economist Pierre-Olivier Gourinchas says, “The world may soon be teetering on the edge of a global recession, only two years after the last one.”
In addition to Russia’s invasion on Ukraine, the high inflation is also responsible for placing the global economy in peril, says the IMF. Despite the global slowdown, inflation has been revised up, in part due to rising food and energy prices.
What is Economic Recession and how can we survive this difficult condition?
What is Economic Recession?
An economic recession is generally understood as a period of significant decline in economic activity, as reported by The Economist. More specifically, as stated by US-based The National Bureau of Economic Research (NBER) Business Cycle Dating Committee, an economic recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
As a result of the economic contractions, many businesses across different sizes and scales have to face equally dire impacts. Business going bankrupt will consequently lead to rising unemployment rate and poverty. Enterprises that are struggling to survive often have to cut costs, leading to decreasing wages. Therefore, economic recession can severely affect workers as it puts their sources of income at risk.
Economic recession impacts not only businesses and workers but also investors. The economic downturn causes demands to drop, ultimately leading to the dropping asset prices. In 2020, for instance, the economic recession caused by the Coronavirus caused a drop in the prices of oil and share prices.
Also, economic recession usually causes government bonds to fall in yield. As savings tends to rise during economic recession, people’s demand for government bonds increase as they offer more security compared to shares. The yield may increase if the market fears that the recession causes liquidity shortage
How is the recession forecast for Indonesia?
After understanding how economic recession can bring significant impacts, you might be wondering if economic recession will also affect Indonesia. As reported by Antara, the Indonesian Ministry of Finance Sri Mulyani Indrawati will remain vigilant in the face of impending global economic recession.
“We will not be complacent, we will remain vigilant,” she stated during a press conference on the 2022 G20 Indonesia side activities in Nusa Dua, Badung, Bali, on Wednesday (07/13/2022).
She added, all policy instruments and regulations will be used to monitor the possibility for an economic recession, especially regulations from corporations in the country.
Recently, a Bloomberg survey ranked Indonesia 14th with a recession probability of 3 percent, far lower than Sri Lanka, which took first place with a recession potential of 85 percent. Minister Indrawati believes that the low recession probability is supported by the resilience of domestic economic growth, indicators of the balance of payments, and the strong State Budget (APBN).
However, she emphasized that we have to remain vigilant as the condition is forecasted to last until next year.
“Global risks regarding inflation and recession or stagflation are very real and will become one of the important topics to discuss during the Indonesian Presidency of G20,” she said.
Preparing for Difficult Times According to the Quran
Despite Indonesia’s low recession probability, it is better for us as individuals to plan financially in case of an economic recession. The Quran has given a clear example that we must prepare for impending adversities even if we are currently in the state of security.
In the story of Prophet Yusuf (Joseph), Allah tells us how the Egyptian ruler at the time dreamed of seven fat cows being eaten by seven lean ones, and seven green spikes of grain and others were dry. He then sought counsel from the court soothsayers and magicians.
One of the members of the court suggested that he consult Yusuf, who was given the ability by Allah to interpret dreams. He then told the king that Egypt will face seven years of fertility followed by seven years of famine.
Yusuf then advised the king to store what they reap during the years of fertility except for a little that they eat so that they would have enough food supply when the years of famine comes.
This is an example of making adequate preparations to face an upcoming adversity. The years of famine during the time of Prophet Yusuf is akin to an economic recession. Just like Prophet Yusuf advised the Egyptian ruler to make enough provisions to face difficult years, we too must have enough provision to face economic downturn that might occur unpredictably.
4 Ways to Help Us Endure Economic Recession
One of the lessons we can take from the story of Prophet Yusuf is that we must prepare ourselves in case of an economic recession because an economic recession is often inevitable. How can we make ourselves prepared in the face of an economic recession? Here are five tips that you can follow, adapted from US News and CNBC Indonesia.
Change the Way You Spend
As the economic downturn is looming, you might want to rethink the way you use your money. Review how your expenses change over the past year and determine which expenses you can cut or reduce. For a start, focus on your essential needs. Reduce the budget for leisure activities like movies, coffee, or travelling.
Manage Your Debts
Keep a healthy debt-to-income ratio by maintaining it below 30 percent. If you want to be more conservative, set a threshold at 20 percent. Pay off your debts, beginning from the ones with the highest interest rate. This will keep your cash flow healthy.
Plan for a Possible Job Loss
Unemployment rate tends to hike during an economic recession. Assess your personal risk and plan accordingly. Work to make yourself more valuable to your employer and keep an eye on new job opportunities.
To help you prepare for the worst case scenario in which, God forbid, you have to be laid off, build an emergency savings of at least three to six months of expenses saved in cash.
Save and invest
As mentioned above, saving is one of the best ways to prepare for an economic recession. If you have a financial surplus, don’t hesitate to save it in a separate account as an emergency saving that is easy to liquidate just in case.
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