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IN RECENT months, the probability of a recession in the United States has shown an upward trend and is approaching the psychological threshold of 50%.
This figure is not merely a technical statistic, but rather an early signal that has been shown for decades to strongly correlate with a global economic slowdown. However, recent developments reveal a more complex nuance: the risk is indeed increasing, but has not yet fully reached the “50:50” level, according to many market participants.
The report from Moody’s Analytics is even more pessimistic than the Wall Street consensus. On the other hand, modeling from Oxford Economics provides an important perspective: the world will only be pushed into recession if oil prices spike to around US$140 per barrel and persist for at least two months. This means that the current global recession is not inevitable, but rather highly dependent on the intensity and duration of shocks, particularly from the energy and geopolitical perspectives.
This is where the role of the Middle East region becomes crucial. Disruptions to global energy distribution routes, particularly through the Strait of Hormuz, could potentially trigger a drastic spike in oil prices.
Approximately 20% of the world’s oil supply passes through this route, so any escalation of conflict that disrupts distribution will be immediately reflected in global energy prices. If this extreme scenario were to occur, the impact would spread rapidly to global inflation, production costs, and even the purchasing power of people in various countries.
Experience since the 1990s shows that global financial markets recover relatively quickly after conflicts in the Middle East subside. However, the current situation is different.
Remaining high global inflation and tight interest rate policies mean that recovery could potentially be slower than in previous episodes. In other words, the world faces a more complex combination of risks: energy pressures, tight monetary policy, and intertwined geopolitical uncertainty.
Bank Indonesia’s role is strategic in maintaining this stability. However, short-term stability alone is not enough. Indonesia needs a more comprehensive strategy to face increasingly complex global uncertainties.
History provides important lessons. During the 2008 global financial crisis, the United States’ economic contraction quickly spread worldwide, suppressing international trade and shaking financial markets.
Indonesia, although relatively resilient compared to many other countries, still experienced a significant slowdown. Exports plummeted, the rupiah exchange rate was depressed, and economic growth fell from 6.0% in 2008 to around 4.6% in 2009. A similar situation occurred again during the Covid-19 pandemic in 2020, when the Indonesian economy contracted by -2.1%.
Now, with the probability of a global recession rising again, it’s important to understand that Indonesia does not exist in a vacuum. As part of an open economy, Indonesia is closely connected to global dynamics through three main channels: trade, finance, and market expectations.
First, from the trade side. Around 20–25% of Indonesia’s gross domestic product (GDP) is directly linked to exports and imports.
Commodities such as coal, crude palm oil (CPO), and nickel form the backbone of exports. When the global economy slows, demand for these commodities tends to decline. This is usually followed by a decline in prices on the international market.
As an illustration, the price of coal, which reached over US$400 per ton in 2022, fell drastically as global demand weakened. The decline in commodity prices directly erodes export revenues and impacts state revenues, given that this sector contributes significantly to tax and royalty revenues.
Second, from a financial perspective. The increased probability of a recession is often associated with tight monetary policies in developed countries, particularly the United States. When global interest rates rise, investors tend to withdraw funds from developing countries and return to assets perceived as safer. This phenomenon is known as capital outflow.
The impact on Indonesia is quite significant: the rupiah weakens, the stock market fluctuates, and borrowing costs rise.
In these conditions, Bank Indonesia often faces a dilemma between maintaining exchange rate stability and promoting economic growth. While raising domestic interest rates can curb capital outflows, it also has the potential to depress consumption and investment.
Third, market expectations. In a modern economy, perception is often as important as reality. When market participants perceive a rising probability of a recession, they tend to be more cautious. Companies delay expansion, households reduce consumption, and investors hold back on investments.
This psychological effect can accelerate the economic slowdown, even before the real impact is truly felt.
However, Indonesia has a number of structural advantages that make it relatively resilient to external shocks. One of the most important is the dominance of domestic consumption. Around 52–55% of Indonesia’s GDP is supported by household consumption. This means that as long as people’s purchasing power remains strong, the national economy remains sufficiently buoyant.
Furthermore, fiscal reforms in recent years have strengthened the resilience of the state budget. The government debt-to-GDP ratio remains in the range of 38–40%, relatively low compared to many other countries.
The fiscal deficit has also returned to below 3 percent after widening during the pandemic. This fiscal space is crucial if the government needs to issue stimulus to cushion the impact of the global slowdown.
However, resilience does not mean invulnerability. The main challenge going forward is how to manage risks without sacrificing growth momentum.
Facing a potential global recession, Indonesia needs to move from a merely reactive response to a more anticipatory and structured strategy. There are at least five key steps.
First, the government needs to keep the deficit under control, while also being flexible in responding to crises. Energy subsidy reform is crucial, particularly by improving targeting to make it more targeted. In times of high oil prices, an automatic adjustment mechanism can reduce sudden pressure on the state budget.
Second, maintain exchange rate stability and capital flows. Close coordination between the government and Bank Indonesia must be strengthened to anticipate capital outflows. Foreign exchange intervention, measured interest rate policies, and deepening of the domestic financial market are important instruments for maintaining rupiah stability.
Third, reduce dependence on commodities. Surging commodity prices are profitable in the short term, but create high volatility.
Therefore, industrial downstreaming must be accelerated and expanded, not only in the minerals sector but also in agriculture and manufacturing. Export diversification is key to reducing vulnerability to global cycles.
Fourth, protect domestic purchasing power and consumption. With household consumption contributing more than 50% of GDP, maintaining purchasing power is a top priority.
The government needs to ensure food price stability, expand targeted social assistance programs, and encourage job creation. Without strong consumption, economic growth will easily be depressed by external shocks.
Fifth, accelerate economic transformation and productivity. In the long term, economic resilience is determined by productivity. Investments in education, technology, and digital infrastructure must be accelerated.
This transformation will not only increase economic efficiency but also create new, more sustainable sources of growth that are less dependent on commodity cycles.
The increasing probability of a global recession should be seen as an early warning, not a certainty. Oxford Economics’ scenarios suggest that the world still has a chance to avoid a recession, as long as energy shocks do not reach extreme levels. However, geopolitical uncertainty makes this risk real and cannot be ignored.
Indonesia is in a relatively strong position, but not without risks. Current resilience must be transformed into long-term resilience through appropriate policies, structural reforms, and preparedness for various scenarios.
In an increasingly connected global economy, the key question is no longer whether shocks will occur, but how prepared a country is to face them. And in this context, Indonesia’s economic future will be largely determined by the quality of its policy responses today. [written by Dr. Aswin Rivai, Economic Observer and Lecturer at the Faculty of Economics and Business, UPN Veteran, Jakarta/photo special]
