Japan and UK fall into recession, raising global concerns

The UK and Japanese economies have officially entered recession.

A recession is declared when an economy shrinks rather than grow for two consecutive three-month periods.

In the United Kingdom, the gross domestic product (GDP), a major measure of economic growth, declined 0.3% between October and December, according to the Office for National Statistics.

The fall is steeper-than-expected as economists had forecast a 0.1% contraction. It followed 0.1% of negative economic growth in the three months from July to September.

Japan’s GDP contracted by 0.4% in the last quarter, also a worse-than-expected. It came after the economy shrank by 3.3% in the previous quarter. Economists had expected Japan’s GDP to grow by more than 1% in the last quarter of last year.

The figures from Japan’s Cabinet Office also show that the country has lost its position as the world’s third-largest economy to Germany. A weaker Japanese yen was a key factor in the drop to fourth place, since comparisons of nominal GDP are in dollar terms.

The data for both countries are the first reading of their economic growth for the period and could still be revised.

Economic downturn

Both Japan and the UK face significant domestic challenges as they navigate their respective economic downturns. Japan’s population has been shrinking and aging for years, and stagnating wages have left households reluctant to spend. The UK’s consumer spending power has been eroded by the cost of living crisis, with high inflation and expensive energy bills eating into disposable income.

Analysts expect the UK recession to be mild and short-lived. Still, it is likely to prompt the Bank of England cut interest rate and bring down the cost of borrowing sooner, to drive growth.

The data will be bad news for Prime Minister Rishi Sunak and the Conservatives, who made growing the economy one of their five key pledges.

In response to the data, UK finance minister, or Chancellor of the Exchequer, Jeremy Hunt said: “High inflation is the single biggest barrier to growth which is why halving it has been our top priority. While interest rates are high – so the Bank of England can bring inflation down – low growth is not a surprise.

“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low. Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy.”

On X, Labour leader Sir Keir Starmer wrote: “Rishi Sunak has failed to turn the corner on 14 years of Tory economic decline. Britain is hit by a recession and it’s working people who will pay the price. It’s time for change. Only Labour will deliver it.”

Japan loses position

Japan held the position as the world’s second-largest economy until it was surpassed in 2010 by China. Japan’s nominal GDP reached $4.2 trillion last year, slightly trailing Germany’s $4.4 trillion, or $4.5 trillion, depending on currency conversion rates.

The United States maintains its dominance as the world’s largest economy, boasting a GDP of $27.94 trillion in 2023, while China follows with $17.5 trillion.

Japan faces a labour shortage issue, with immigration being one potential solution. However, the country has been hesitant to accept foreign labour on a permanent basis.