By: Prof. Ari Kuncoro, Ph.D., Rector of UI and Professor of FEB UI
KOMPAS – (10/1/2023) Last week, Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva stated that a third of the world will experience a recession in 2023. The reasons are the ongoing Russia-Ukraine conflict, high commodity prices, the resurgence of Covid-19 in China, and the higher interest rates in the United States.
World economic locomotives, which are the US, Europe and China, will experience a slowdown in their economies. Other countries that are not experiencing a recession will feel the impact through global supply chains in the form of slowing exports and/or increasing import costs. The statement from the IMF above was responded by the world oil market with a drop in the price of West Texas Intermediate (WTI) oil from around US$80 to $73 dollars per barrel.
Seeing the inconsistency of the US macro data, there are interesting phrase from several headlines in the US. The 2023 recession is expected to be as vast as the ocean, but the depth is only knee-deep or ankle-deep (shallow recession).
The recession in the US is not expected to last too long, mainly due to changes in the behavior of people’s aggregate demand. This will have a global impact because the US is still the locomotive of the world economy.
According to Alan Greenspan, former chairman of the US central bank (The Fed) from 1987-2006, a recession will still occur because the Fed wants to improve its credibility in controlling inflation after previously being too slow in raising interest rates.
It is suggested that The Fed moderates the increase of its benchmark interest rate to avoid a recession carrying a risk of being fulfilled because it will be seen as an attempt to protect the capital market only.
It is inevitable that the US capital market will be affected. Approaching the next Fed meeting on January 31-February 1, these expectations were confirmed. The DOW index fell 300 points in anticipation that the Fed would remain hawkish in light of the latest US jobs growth data, which was still good.
The question is, how deep it is if the recession actually occurs? A survey conducted by Reuters in December 2022 of 48 leading economists in the US provides an interesting view. The majority of respondents, 35 out of 48 people, said the recession would be relatively short and shallow. Moody’s financial institution calls this phenomenon a ‘slowcession’, not a recession.
In this scenario, growth may slow. Inflationary pressure has fallen, but it is still high above the ideal rate of around 2 percent per year. From the survey above, 60 percent of respondents predicted that if there was a contraction, it would not be deep (mild).
Several leading indicators in the early recession have given signals. Since February 2022, house sales have been in a row experiencing contractions. The manufacturing sector procurement managers’ index (PMI) has entered a contraction zone, dropping slightly below 50 since November and declining again to 46.2 in December.
However, apart from these signs, several other indicators still show the vitality of the economy. Surprisingly, the US economic growth on an annual basis in the third quarter of 2022 was recorded at 3.2 percent. Rising from the previous two consecutive quarters of contraction, minus 1.6 and minus 0.6 percent.
Towards a recession, long tenor bond yields are usually lower than short tenors are due to increased uncertainty. This phenomenon is called an inverted yield curve. The inverted yield curve has been flashing since March 2022 due to the interaction of factors such as the pandemic, geopolitical crises, food and energy crises, and the Fed’s behavior (Jacobs; 2022).
However, due to the high growth of the US economy in the third quarter and the complexity of the various factors mentioned above, this time no less than the inventor himself, Professor Campbell Harvey from Duke University, doubts the accuracy of the timing of this indicator.
Demographic factors
The culprit that made the early indicators of a recession in the US inconsistent with one another is public consumption. Data for the third quarter of 2022 show that expenditure on health and other services can compensate for the decline in consumer spending on durable goods such as vehicles, electronics, and others.
2022 was the worst year in a decade for the US auto sales, which dropped 8 percent compared to 2021. In compensation, demand has been held back during the pandemic and revenue not spent on durables was used to buy services, including eating out. out of the house, traveling, and other services, resulting in a growth spurt.
In this regard, the CEO of US airline, United Airlines, said in an interview in early December 2022 that he does not see a recession in his passenger travel data (Gordon; Bloomberg, December 2022).
There is a hypothesis linking this to a new demographic phenomenon, which is the large number of adult children returning to live in their parents’ houses. The causes are high rental prices for apartments/houses, delayed marriage, and pursuit of postgraduate education during the pandemic (Pandurangi; December 2022).
Recent US population census data shows 48 percent of adult children are back living with their parents as they were in the 1940s. Living at home can save on daily expenses so that disposable income can be used to buy luxury goods, such as expensive watches, jewelry, fine dining, and cruises.
According to the IMF prediction above, a third of the world’s countries will experience a recession. If a recession is defined as two consecutive quarters of negative economic growth, the remaining two-thirds are expected to experience at least a slowcession or with the right combination of policies may be able to stay around a long-term growth path.
In dynamic mathematical terms, they can still hold on to the saddle points. The term saddle arises because even though it is galloping, walking slowly in puddles, or jumping over obstacles, the horse will still be controllable as long as the rider is reliable.
The national economy’s capability in surviving a recession is in its excellent growth performance in 2022 in the mobility sector. This precondition increases the chances for Indonesia to remain at saddle points with a steady-state growth of around 5 percent per year. The removal of Implementation of Restrictions on Social Activities, even though the health protocol still continues, marks a policy of maintaining mobility-based sources of growth.
Data on growth for the fourth quarter are not yet available, but early indicators from the production side still give hope. The PMI index increased to 50.9 in December from 50.3 last month. From the demand side, the Consumer Confidence Index (CCI) remains in the optimistic zone with a value of around 120.
Source: https://www.kompas.id/baca/opini/2023/01/08/signal-resesi-dangkal-di-as
Hafiiz
Manager of ICTC-Humas FEB UI
Media contact: Nino Eka Putra, AM.d. (Journalist at FEB UI, mediacenter.feb@ui.ac.id; 085719583799)
