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Recession Is: Definition, Causes, Impact, and How to Deal with It

Admin BFI
21 October 2022
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Recession Is: Definition, Causes, Impact, and How to Deal with It

Lately, the virtual world has been shocked by the word 'recession'. Because of the popularity of the word, many people feel anxious to welcome the year 2023. Next year is also predicted to be a dark year.

Recession is an economic term that describes the economy of a country caused by various factors.

What exactly is a recession and why are so many people worried when a recession does happen? Let's peel one by one about the recession in the following description.

 

Definition of Recession

A recession is a term used to describe a situation in which a country's economic turnaround is slow or bad. This slowing economic cycle can last for quite a long time, even annually as a result of the growth of a country's gross domestic product (GDP) declining for two karts and taking place continuously.

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.

Meanwhile, the National Bureau of Economic Research (NBER) which is located in the United States, defines a recession as a condition in which a country experiences a significant decline in economic activity within a few months in terms of real GDP, income, unemployment rate, industrial production, wholesale-retail sales.

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.

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

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.

Resesi Adalah

Image Source: Freepik

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.

Well, for those of you who are planning to open a business or need additional capital, you can apply for a loan at BFI Finance. BFI Finance has been verified by OJK. By applying for a loan at BFI Finance you will get various benefits. Including the following.

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Disbursement of funds up to 85% of the value of the vehicle and a tenor of up to 3 years.

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Loan funds with a fast process and a maximum tenor of up to 18 months.

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Low interest starts from 0.9% with a long tenor of up to 48 months.

You can access complete information regarding loans and further questions through the following page.

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Purchase sharia used and multi-purpose cars with the No Fines and No Penalties feature See Terms

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Get a loan with a fast process and a maximum tenor of up to 24 months. See Terms

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Get a disbursement fund of up to 85% of the vehicle value and a tenor of up to 4 years. See Terms

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