Britain’s and Japan economies, have reportedly fell into a recession in the second half of 2023, a tough backdrop for Prime Minister Rishi Sunak who has promised to boost growth ahead of an election expected later this year.
Gross domestic product (GDP) contracted by a worse-than-expected 0.3% in the three months to December, having shrunk by 0.1% between July and September, official data showed.
Japan loses crown as world’s third-largest economy after it slips into recession.
According to a Reuters poll of economists had pointed to a smaller 0.1% fall in the October-to-December period.
Sterling weakened against the dollar and the euro. Investors added to their bets on the Bank of England (BoE) cutting interest rates this year and businesses called for more help from the government in a budget plan due on March 6.
“Businesses were already under no illusion about the difficulties they face, and this news will no doubt ring alarm bells for government,” Alex Veitch, director of policy and insight at the British Chambers of Commerce, said.
“The chancellor must use his budget in just under three weeks’ time to set out a clear pathway for firms and the economy to grow.”
Finance minister Jeremy Hunt said there were “signs the British economy is turning a corner” and “we must stick to the plan – cutting taxes on work and business to build a stronger economy.”
Media reports said Hunt was seeking to cut billions of pounds from public spending plans to fund pre-election tax cuts in his budget, if penned in by tight finances.
The Office for National Statistics (ONS) said the economy grew 0.1% across 2023 compared with 2022. The BoE has said it expects output to pick up slightly in 2024 but only to 0.25% growth.
Britain’s economy has been stagnating for nearly two years, though recessions in the country have become increasingly rare as the economy grows larger and more mature.
The COVID-19 pandemic triggered the deepest contraction on record over two quarters in early 2020. Before that the global financial crisis sparked a severe recession that lasted just over a year, from the second quarter of 2008 through to the second quarter of 2009.
Data on Wednesday showed inflation held at a lower-than-expected 4.0% in January, reviving talk among investors about a BoE rate cut as soon as June. But strong wage growth reported on Tuesday underscored why the BoE remains cautious.
The fall in GDP in the fourth quarter was the biggest since the first three months of 2021 when Britain imposed new COVID-19 restrictions.
Economic output fell by 0.1% in monthly terms in December after 0.2% growth in November, the ONS said. The Reuters poll had pointed to a 0.2% fall in December.
The ONS said the manufacturing, construction and wholesale sectors were the largest contributors to the decrease in GDP over the last three months of last year.
GDP per person dropped in every quarter of 2023 and has not grown since early 2022, representing the longest such run since records began in 1955.
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Japan
Similarly, Japan lost its crown as world’s third-largest economy after it slips into recession
Fall in rank below Germany has been attributed to a weak yen and country’s ageing, shrinking population
Japan has been eclipsed by Germany as the world’s third-biggest economy and has slipped into recession, according to data released Thursday, as the country battles a weak yen and an ageing, shrinking population.
Japan’s economy, now the world’s fourth-biggest, grew 1.9% in 2023 in nominal terms – meaning it is not adjusted for inflation – but in dollar terms its gross domestic product (GDP) stood at $4.2tn compared with $4.5tn for Germany.
The shift, coming more than a decade after it ceded second place to China, has been attributed to the yen’s sharp falls against the dollar over the past two years. A weaker yen eats into profits on exports when earnings are repatriated.
The Japanese currency dropped by almost a fifth against the US dollar in 2022 and 2023, including a 7% fall last year.
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Like Japan, Germany is resource poor, has an ageing population and is heavily dependent on exports. Europe’s biggest economy has also been shaken by rising energy prices caused by Russia’s war in Ukraine, rising interest rates in the eurozone and a chronic shortage of skilled labour.
While Japanese carmakers and other exporters have benefited from a weak yen – which makes their goods cheaper on the international market – the country’s labour crunch is worse than Germany’s, and it is struggling to address a low birth-rate.
The failure of government-led attempts to boost the birthrate means chronic labour shortages are expected to worsen, even as the country welcomes a record number of foreign workers.
The economy revitalisation minister, Yoshitaka Shindo, told reporters that Germany leapfrogging Japan showed it was “imperative” to promote structural reforms, including getting more women into full-time work and lowering the barriers to foreign investment.
“We will deploy all policy steps to support pay rises” to encourage demand-driven growth, Shindo said, according to the Kyodo news agency.
Thursday’s data showed that real GDP – the total value of goods and services – shrank 0.1% in the last three months of 2023 compared to the previous quarter, due to weak spending by households and businesses, according to the cabinet office.
Private consumption, which accounts for more than half of all economic activity in Japan, fell 0.2% as households struggled with the rising cost of living and a fall in real wages.
Growth for the previous quarter was also revised downward to -0.8%, meaning that Japan is in technical recession – typically defined as two consecutive quarters of contraction.
During the boom years of the 1970s and 80s, some predicted that Japan’s cheap, good-quality exports of autos and consumer electronics would see it overtake the US as the world’s biggest economy.
Instead, the bursting of Japan’s asset-inflated bubble economy in the early 1990s ushered in several “lost decades” of economic stagnation and deflation.
The latest data reflect the realities of a weaker Japan – one that can expect to have less of a presence in the global economy, said Tetsuji Okazaki, a professor of economics at the University of Tokyo. “Several years ago, Japan boasted a powerful auto sector, for instance. But with the advent of electric vehicles, even that advantage has been shaken,” he said.
In 2010, China’s newly acquired status as the world’s second biggest economy prompted a bout of soul-searching in Japan about its ability to keep pace with emerging economies.
While Japan’s recent slip to fourth place has been attributed to dramatic currency moves, losing third spot to a troubled German economy will deal a blow to its self-esteem and to the already unpopular prime minister, Fumio Kishida.
And the slide is unlikely to end there. India’s economy, buttressed by a large and growing young population, is projected to overtake Japan in 2026 and Germany the following year, according to the International Monetary Fund.
The Nikkei business newspaper said in a recent editorial that Japan had failed to raise its potential for growth – a predicament economists have attributed to its demographic crisis.
“This situation should be taken as a wake-up call to accelerate neglected economic reforms,” the Nikkei said.
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