Bad news for big economies as UK, Japan slide into recession

Two major world economies, Japan and the UK, have fallen into a recession in the second half of 2023.

While Japan’s ‘unexpected fall comes off the back of a contracting gross domestic product (GDP), its economy also shrank by 3.3pc in the previous quarter, the UK’s decline comes ahead of this year’s expected election for PM Rishi Sunak, who has promised to boost growth.

The figures from Japan’s Cabinet Office also indicate that the country has lost its position as the world’s third-largest economy to Germany, BBC News reported.

Economists had expected the new data to show that Japan’s GDP grew by more than 1pc in the fourth quarter of last year. The latest figures were the first reading of Japan’s economic growth for the period and could still be revised. Two quarters in a row of economic contraction are typically considered the definition of a technical recession.

Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts at a unit of Toyota Motor Corp all point to a challenging path to an economic recovery. “What’s particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute. “The economy will continue to lack momentum for the time being with no key drivers of growth.”

In October, the International Monetary Fund (IMF) forecast that Germany was likely to overtake Japan as the world’s third-largest economy when measured in US dollars.

The IMF will only declare a change in its rankings once both countries have published the final versions of their economic growth figures. It began publishing data comparing economies in 1980.

Economist Neil Newman told BBC News that the latest figures show that Japan’s economy was worth about $4.2 trillion in 2023, while Germany’s was $4.4tr. This was due to the weakness of the Japanese currency against the dollar and that if the yen recovers, the country could regain the number three spot, Mr Newman added.

At a press conference in Tokyo this month, the IMF’s deputy head, Gita Gopinath, also said an important reason for Japan potentially slipping in the rankings was the yen falling by about 9 percent against the US dollar last year. However, the weakness of the yen has helped to boost the share prices of some of Japan’s biggest companies as it makes the country’s exports, such as cars, cheaper in overseas markets.

The UK’s GDP contracted by 0.3pc in the three months to December, having shrunk by 0.1 percent between July and September, official data showed. The 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. Thursday’s data means Britain joins Japan among the Group of Seven advanced economies in a recession, although it is likely to be short-lived and shallow by historical standards. Canada has yet to report GDP data for the fourth quarter.

Britain’s economy stands just 1pc higher than its level of late 2019, before the COVID-19 pandemic struck with only Germany among G7 countries faring worse. Mr Sunak promised to get the economy growing as one of his key pledges to voters last year. His Conservative Party has dominated British politics for much of the past seven decades, with a reputation for economic competence. But Labour is now more trusted with the economy, according to opinion polls.