Global Economic Slowdown and Policy Response

Global Economic Slowdown and Policy Response

By Ryan Kiryanto, Economist and Co-Founder & Expert Board of the Institute of Social, Economic and Digital (ISED)

Jakarta – CURRENTLY, policy makers around the world are no longer only focused on the steps taken by the central bank of the United States (US), The Fed, in setting policies in their countries. There are several other variables that must also be calculated, for example the resolution of the COVID-19 pandemic problem that is still looming over several countries (especially China), geopolitical tensions in Europe after Russia’s aggression against Ukraine which is said to be far from over, soaring prices in the energy and food sectors, and symptoms of deglobalization or fragmentation of economic power.

Now there are indeed more factors that need to be considered and not only focused on the policies of the Fed which is struggling with inflation. The inaccuracy of policy makers in conducting a thorough assessment of the various factors mentioned above will have a serious impact on the economic recovery process in each country.

What is certain is that inflation spikes in almost all parts of the world have responded by central banks in every country by raising their benchmark interest rates as a policy normalization strategy. The range of accumulated increases is also quite aggressive, ranging from 50 basis points (bps) to 225 bps.

The biggest increase for developed countries occurred in the US when the Fed raised its benchmark interest rate by 225 bps from March to July. The move is expected to continue at the next meeting of policy makers, although the level of aggressiveness is reduced.

This extraordinary step was taken to contain the inflation rate which had soared to the level of 9.1% (June) and has now slid to the level of 8.5% (July) thanks to the Fed’s aggressive move to increase the Fed Funds Rate (FFR). However, efforts to achieve the inflation target at the level of 2% will still take a long time.

The Fed Chairman, Jerome Powell and his colleagues have made a firm commitment to fighting inflation, even though this move would hurt the US economy and the profits of companies operating in the country.


Complications of Global Problems

Policy makers and business actors around the world have realized the risks, including the war between Russia and Ukraine, one of which is a spike in global energy and food prices due to disruptions in global supply chains. Understandably, the war in Ukraine has dragged various pro-Russian and pro-Ukrainian countries to cross disputes with various provocations, thus hampering the mobility of all modes of transportation between countries and between regions by land, sea and air.

The flight schedules of commercial aircraft (passenger and cargo) and the departure schedule of marine vessels were disrupted by the embargo and lockout policies by each disputing party. That is the consequence of a war that makes suffering for many innocent people.

The proof, now the Russian economy is falling. Russia’s Statistics Agency noted that gross domestic product (GDP) contracted 4% in the second quarter of 2022, which is the first period since Russia sent troops to Ukraine.

This sharp decline indicates there has been a drastic change in the Russian economy since the conflict in Eastern Europe erupted in February. It also marked a sharp reversal from the first quarter when the Russian economy grew 3.5%. The deteriorating economic conditions were triggered by various Western sanctions, including the severance of Russian banks from the international transfer system and the exodus of a number of foreign companies.

If global economic conditions worsen and Russian exports are subject to additional sanctions, then Russia’s economic downturn next year may be deeper and new growth will resume in 2025.

Poor economic conditions also hit Ukraine. After being invaded by Russia since the end of February 2022, the Ukrainian economy slumped in the first quarter of this year with a contraction of 15.1% (year on year / yoy) compared to the first quarter of the previous year. When compared with the fourth quarter of 2021, the Ukrainian economy has fallen 19.3% (quarter on quarter / qoq).

Although currently world oil prices are observed to have fallen below US$100/barrel and inflation has shown signs of slowing down even though it is thin, the level of vigilance should not slacken. First, the situation in Europe remains to be seen. The energy crisis is getting worse, with natural gas and electricity prices soaring. This has pushed the Euro zone inflation rate above 9% and increased the chances of a severe recession. The European Central Bank (ECB), which covers 19 European countries, is expected to continue the cycle of rate hikes to curb inflation, although this move will slow economic growth.

At a time of uncertainty surrounding inflation and the response of policy makers, market players and the business world seem to have taken into account the potential for a recession in Europe, as reflected in the deep weakness of the euro against the US dollar.

Second, the economic development of China, the country with the second largest economic power in the world, must also be observed. The “ultra-defensive” policy through locking economic activity to suppress COVID-19 cases to zero levels has caused distortions in the global economy because China is one of the main players.

China’s extreme measures coupled with the crisis in its property sector caused its GDP growth to only range from 4.0%-4.4% this year and rise to the range of 4.4%-4.8% next year. Thus, the era of double-digit economic growth for China has passed and now the country is entering the new normal phase of economic growth of around 5% per year.

In contrast to the central banks of developed countries that carry out a tightening policy, the People’s Bank of China (PBOC) actually implements a super-loose policy by lowering the benchmark interest rate and the minimum reserve requirement ratio (GWM) of banks to stimulate depressed economic growth.

Third, policy makers, business players, and global financial market players must also pay attention to the potential for currency destabilization as a result of the strong strengthening of the US dollar. The US dollar has appreciated against other strong world currencies, particularly the euro and the pound sterling, especially against currencies of developing countries, including the rupiah.

The point is that policy makers, business players, and financial market players around the world should not only focus on the Fed’s moves. There are other dynamics and risks that also play a role, so proper and measurable policy alignment and balance is needed.



Predicting the future becomes important to do through an assessment tool. Various credible international institutions, such as the International Monetary Fund (IMF) and the World Bank (World Bank), have released estimates of global, regional, and individual economic growth this year and next year with various assessment instruments. This can be used as a reference for policy makers and business actors in designing economic and investment policies.

The year 2022 can be said to be the year of global economic recovery with various policy normalization steps in almost all over the world. The year 2023 is a year of revival towards normal conditions as before the COVID-19 pandemic phase, although the shadow of war in Ukraine still lingers. However, with the expectation that war tensions will gradually decrease due to the support of international reconciliation, it is hoped that the acceleration of global economic revival will be realized. Moreover, the extreme lockdown policy in China may have been lifted and the country has resumed its pace as one of the pillars of the world’s economic power.

Until now, the US is still the country with the largest economy in the world with a GDP of US$25.3 trillion, followed by China as the second largest country with a GDP of US$19.9 trillion, as well as leading Asia. Although China’s GDP growth has decreased in recent years, it is predicted to overtake the US by 2030. Germany is the fourth and largest economy in Europe with a GDP of US$4.3 trillion, followed by the UK and France with a GDP of each US$3.4 trillion and US$2.9 trillion. Japan has a GDP of US$4.9 trillion, and is the third largest economy in the world and the second largest in Asia after China.

For portfolio investors, investing in emerging markets needs to take into account potential risks that are greater than in their domestic markets, because there are political, exchange rate, economic, interest rate and market risks.

Currently, if investors want to invest in commodity instruments, they are also faced with significant potential risks. Understandably, commodity prices can be influenced by various factors, including changes in supply and demand relations, government programs and policies, geopolitical tensions, economic slowdown of a country or region, global economic fragmentation, events of war and acts of terrorism, changes in commercial interest rates and values. exchange, commodity trade contract agreements, global pandemics, and climate change and technology. All of these have an impact on the price volatility of a commodity which is extreme and difficult to predict.

Meanwhile, tighter monetary policy will reduce demand in economic and business activity, accompanied by a shrinking workforce and higher wages and inflation than previously expected. Policy adjustments in developed countries have been followed by developing countries, especially in Asia.

Economists warned that Asia would not be able to get away without experiencing an economic downturn if the US plunged into recession. Several countries in Southeast Asia are predicted to be hit harder than other countries. According to economists, Singapore and Thailand will most likely be the first to be affected if the US heads into a recession.

Besides Thailand, countries in Southeast Asia that are also vulnerable to being affected first if the US falls into recession are Singapore because of their export dependence and the size of their small and open economy. Singapore’s GDP growth has historically been more correlated with the US business cycle due to its export-oriented economy.

Singapore does not have a strong domestic market and relies heavily on international trade activities (including shipping and cargo operations) to sustain its economy. However, it is also mentioned that if the US is headed for a recession, the downward trend tends to be shallow. This is because China is the largest export market for most Southeast Asian countries. However, because exports to China were very weak following the implementation of the extreme lockdown policies and also because Singapore was so dependent on exports, it hit the Singaporean economy badly.

Until now, the tug-of-war between inflation control and recession in the US is still ongoing, considering that the Fed is still hawkish towards raising its benchmark interest rate. Previously the US government had announced negative growth in the first and second quarters of this year which some considered a technical recession.

Actually, the US economy has entered a phase of stagflation, in this case its economic growth is slowing down with a high rate of inflation. However, this was not accompanied by a soaring unemployment rate, on the contrary, the unemployment rate was relatively under control. The unemployment rate in August 2022 was 3.7%, up from 3.5% in the previous month. However, employment is still promising. The number of unemployed rose by 244,000 to 6.014 million people. Meanwhile, the employment rate rose by 422,000 to 158,732 million.

This condition prompted the US government and the Fed to immediately end the period of high inflation through tight monetary policy to reduce inflation to the 2% target and prepare for the economic recovery phase as before the COVID-19 pandemic. A similar pattern to the Fed’s move was also carried out by other central banks with the same main indicators, namely high inflation accompanied by weak economic growth.

How about Indonesia? The policy stance was adjusted during the Bank Indonesia (BI) Board of Governors Meeting on 22-23 August 2022 and decided to increase the BI 7-Day Reverse Repo Rate (BI7DRR) by 25 bps to 3.75%, the Deposit Facility interest rate by 25 bps to 3.00%, and the Lending Facility interest rate by 25 bps to 4.50%.

This decision is a pre-emptive and forward looking step to mitigate the risk of rising core inflation and future inflation expectations due to the adjustment of subsidized and non-subsidized fuel prices and volatile food inflation, as well as strengthening the rupiah exchange rate stabilization policy so that it is in line with its fundamental value. due to the high uncertainty in global financial markets. With this policy, the stability of the rupiah exchange rate is maintained.

Inflationary pressures increased mainly due to high global food and energy commodity prices. Consumer Price Index (CPI) inflation in July 2022 was recorded at 4.94% (yoy), higher than inflation in the previous month which was 4.35% (yoy). Meanwhile, core inflation remained relatively low at 2.86% (yoy) supported by the consistency of BI’s policy in maintaining inflation expectations.

Various recent developments related to the adjustment of subsidized and non-subsidized fuel prices are expected to push inflation in 2022 and 2023 at risk of exceeding the target upper limit of 3.0±1% so that a more solid policy synergy between the central and regional governments and BI for controlling measures is needed.

BI together with the Central and Regional Inflation Control Teams are committed to keeping national inflation under control. This was realized through the Synergy of the National Movement for Food Inflation Control on August 10, 2022, in Malang City.

National Movement for Food Inflation Control is a step of joint commitment to optimize inflation control measures from the supply side and encourage production to support food security in an integrated, massive, and national impact. These activities include the expansion of inter-regional cooperation, commitment to operating regional markets prone to inflationary fluctuations in the Java region, as well as the implementation of urban farming and digital farming movements.

So, a change in stance or policy direction must indeed be carried out to anticipate various possibilities and uncertainties that occur in the future. Policy steps with a dovish, pre-emptive and anticipatory stance are the key to success in continuing the momentum of economic growth. (*)