Is Global Recession Imminent?

Author : Bima Prawirosaputro

Is Global Recession Imminent?

There have been a significant reduction in the consensus of 2022 and 2023 global growth forecasts. According to World Bank, the invasion of Ukraine by Russia along with continuous supply disruptions caused partly by the pandemic, and various tightening of macroeconomic policies to reduce inflation and reverse the pervasive measures taken during that time, are few of the most significant factors that contribute to this phenomenon

Previously in January 2022, consensus forecast of global growth was 4,1% for 2022 and 3,3% for 2023, but by August these forecast had been lowered to only 2,8% for 2022 (-31,7% change)and 2,3% for 2023 (-30,3% change).

These downgrades mostly suffered by the advanced economies with changes of -39,5% and-52% for 2022 and 2023 respectively. EMDEs are fore casted to be relatively more robust,downgraded by only -3,9% and -8,9% for those years

If we take a look on the quarterly growth of GDPof world’s largest economies (namely US, EU,and China), we indeed could see some seriousdeceleration.

Despite a recent recovery from the economiceffects of the COVID-19 pandemic, the US GDPsuffered a negative growth of 1.6% and 0.6% inQ1 and Q2 2022 triggering a strong signal ofeconomic recession in the country.

China is facing similar problem, countless lockdowns from the Zero COVID Policy implemented by the government and the burst of property sector bubble, are the two of the most significant factors contributing to economic contraction in Q2 2022

EU is currently on stagnation, but as the energycrisis is still have no end in sight and is affectingEU’s economic powerhouses, as well as thethreat of an upcoming food crisis, there is noguarantee that EU won’t fall into economicrecession as well

Energy Crisis in EU

The Ukraine invasion by Russia has triggereda series of event that led to the energy crisis inEurope as most of EU is still dependent onRussia’s gas and oil supply. As the result,starting in February 2022, the price of energycommodities in EU has skyrocketed particularlyLiquid Fuels and Natural Gas.

Currently, EU has managed to fill its gasstorage to 90% ahead of winter, according tothe International Energy Agency’s quarterlyreport. However, behavior change and cutbacks may be needed if Russia reduces gasexports further, which could reduce theeconomic output particularly in manufacturing sector, further adding downward pressure to the GDP growth

According to the World Bank, CPI Inflation is steadily increasing since February 2021 to multi-decade highs and shows no signof slowing down in multiple countries in Advanced Economies as well as in EMDEs. The rising energy price have only madethe inflation more persistent and more difficult to contain

Monetary Policy Responding the Inflation

As the result of persistent inflation growth,central banks of many countries have risentheir policy interest rate steeply. World Bankcalls this the most internationally synchronousepisodes of monetary policy tightening of thepast five decades.

The Effective Federal Funds Rate of the US arerising faster than any other time in recenthistory, reaching 2.6% in only 6 months.European Central Bank hikes interest rates forfirst time in 11 years and expected to continuerising to as high as 2%. UK Central Bankreached the highest interest rate since 2008 inAugust 2022 at 1,8%.

These policy actions are necessary to containinflationary pressures, but their mutually

compounding effects could produce largerimpacts than intended, both in tighteningfinancial conditions and in steepening thegrowth slowdown

How About Indonesia?

Increasing inflation is also becoming a problem, Indonesia's annual inflation rate accelerated to 4.9% in July 2022 andcontinues to increase to 5.95% in September 2022, the highest level since October 2015. The inflation rate was above theupper limit of the central bank's 2-4% target range for the fourth straight month. Main upward pressures largely came fromcost of food (7.91% vs 7.73% in August), transport (16.01% vs 6.62%), housing (3.19% vs 3.11%), furnishings (5.04% vs4.89%), food & restaurant (4.53% vs 4.20%), education (2.61% vs 2.50%), and clothing (1.56% vs 1.63%). By contrast, costof information & financial fell further (-0.31% vs -0.29%).

However compared to the rest of the world, Indonesia have a much slower rate of increase. Coordinating Minister ofEconomic Affairs Airlangga Hartarto said that “Indonesia's inflation, at a well-maintained 5.9-percent level, makes the countryamong the five countries with the lowest inflation rate in the world”. Self-sufficiency of staple food production keep the volatilefood relatively under control, keeping inflation stable, despite lower government subsidies on fuel price

Sources: World bank, BPS,, antaranews

Bank Indonesia’s Response to the Inflation

Despite relatively moderate inflation, BI have started to hike its policy interest rate in August 2022 to 3.75% and September2022 to 4.25% (previously 3.5% from February 2022). This hike is very moderate with a compounded growth rate of 7.8%making BI among the least hawkish central bank in the world. Comparatively, The Fed and UK Central Bank each has a compounded growth rate of their interest rate of 589.9% and 654.4% respectively for the same period.

Forecasted Economic Growth of Indonesia

Indonesia is forecasted to be a more robusteconomy compared to consensus growth ofEMDEs. For 2022, Indonesia’s GDP growthprojection actually has been upgraded to 5.4%compared to 5.0% in the previous projection.In contrast, growth projection of EMDEs isdowngraded to 3.5% from 4.6%.

For 2023, Indonesia’s GDP growth has been down graded to 5.0% from 5.2% in the previous forecast (3.8% decrease). However,this downgrade is significantly more moderate.Comparatively, consensus projection ofEMDEs is downgraded to 4.1% from 4.5%(8.9% decrease).

Indonesia’s Economic Robustness inGlobal Recession Perspective

World Bank constructed a model that shows the range and movement of global GDP growth in past global recessions (i.e., 1975, 1982, 1991, 2009,and 2020), based on quarterly data. The model shows the pace of the decline of projected global growth over the past year (consensus forecast of 45countries) has been much faster than that during periods preceding earlier global recessions.

If we put Indonesia’s past and projected GDP growth in this perspective, we could see that the economy of Indonesia is currently, and predicted to be stable untilQ4 2022, despite the downwardpressure that usually comes preceding aglobal recession

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