What happened and what is expected to happen in the future

(CNN) — Japan’s economy unexpectedly contracted due to weak domestic consumption, sending the country into recession and causing Germany to lose its position as the world’s third-largest economy.

The United Kingdom entered recession just months before the general elections, according to official data published this Thursday, derailing British Prime Minister Rishi Sunak’s promise to generate economic growth.

Below, we present each country’s outlook in economic matters.

recession in japan

Gross domestic product (GDP) contracted at an annual rate of 0.4% in the last three months of 2023, after a 3.3% annual contract in the previous quarter, the Japanese Cabinet Office reported on Thursday. A recession is usually defined as two consecutive quarters of economic contraction.

This decline was much less than market expectations. Economists polled by Reuters expect gross domestic product to grow by an annualized 1.4% quarter-on-quarter in the months from October to December.

The data confirms that the Japanese economy was the world’s fourth-largest in US dollar terms last year, behind Germany.

Domestic demand was particularly weak. All major categories of domestic demand, including consumer spending, were negative. Only external demand, reflected in exports of goods and services, had a positive balance.

Private consumption – which accounts for half the economy – declined 0.9% annually in the fourth quarter, as Japanese consumers grappled with rising prices of food, fuel and other goods. This is the third consecutive quarter of decline.

Japan imports 94% of its basic energy needs and 63% of its food, so the weak yen contributes significantly to the rising cost of living, Neil Newman, Tokyo-based strategist at JapanMacro, told CNN.

The yen has fallen 6.6% against the US dollar since the beginning of the year, becoming one of the worst-performing currencies among the Group of 10 industrialized nations.

“Private consumption was particularly weak and market expectations were for it to remain stable,” he said. “Unfortunately, this will get even worse after the January Sea of ​​Japan earthquake. People stop spending during natural disasters.”

An earthquake struck the Noto Peninsula in central Ishikawa Prefecture on January 1, causing building collapse, fires and tsunami warnings as far away as eastern Russia. More than 200 people were killed and more than 1,000 were injured.

During the fourth quarter, capital expenditure also declined by 0.3% for the third consecutive quarter. Private sector housing investment fell 4%.

However, foreign demand supported global growth. Exports rose an annualized 11% compared with the previous quarter, helped by the yen’s weakness. In particular, domestic consumption, including tourist expenditure, increased rapidly.

Despite falling into a technical recession, the Japanese market remains bullish, with the benchmark Nikkei 225 index rising 1.2% and closing above the 38,000 level for the first time since 1990.

recovery is expected

Despite the figures, there is hope for recovery. Some economists say the recession is likely to ease in the coming months.

“Despite the disappointing (fourth quarter) result, we expect 2024 (first quarter) GDP to improve,” said Min Ju Kang, chief economist at ING Group.

After declining late last year, private consumption should improve in the current quarter, given the stabilization of inflation and expected wage growth. On the investment side, good business results and solid demand for information technology will also drive investment in facilities, he said.

Capital Economics analysts confirm that economic and labor market surveys paint a more optimistic picture than the main data.

The unemployment rate fell to 2.4% in December, its lowest level in eleven months. Additionally, the Bank of Japan’s Tankan survey showed that business conditions across all industries and company sizes were the strongest since the fourth quarter of 2018, he said.

He said the government may revise the fourth quarter data during its regular review next month.

Goldman Sachs said on Thursday it expects Japan’s economy to grow 1% in the first quarter of 2024.

“We expect the rapid growth in domestic consumption to slow in October-December, but we still expect moderate growth,” its analysts said. He said capital expenditure may also increase by 1.3% during the same period.

Analysts at Capital Economists said they expect fourth-quarter GDP in March to be revised upward and that the Bank of Japan in April is unlikely to derail the GDP numbers by eliminating its negative interest rates.

The investors of the country remain bullish. 2023 was an extraordinary year for the Japanese stock market, with the Nikkei index rising 28%, making it the best-performing market in Asia.

The same day, Morgan Stanley reiterated its bullish outlook on Japanese stocks: “(It) is our highest recommendation (overweight) in our coverage universe.”

According to EastSpring analysts, the rise in Japanese stocks was mainly driven by ongoing trade reforms and improving stock returns, while the weaker yen also helped boost profits for Japanese exporters. Investment.

recession in the united kingdom

According to the United Kingdom’s Office for National Statistics (ONS), GDP fell 0.3% in the last three months of 2023, following a 0.1% contraction in the July to September period. A recession is usually defined as a contraction in two consecutive quarters.

Liz McKeown, director of economic statistics at the ONS, said: “All major sectors declined in the quarter, with the biggest impact on growth in manufacturing, construction and wholesale trade, partly offset by growth in hotels and vehicle and machinery hire. ” statement.

The ONS estimates that UK GDP will grow by just 0.1% in 2023. This is the worst result since 2009, when the economy was still reeling from the global financial crisis, if excluding 2020, which was affected by the global financial crisis. , pandemic. Last year’s weak output growth is followed by a 4.3% increase in 2022.

“Throughout 2023, the economy remains virtually stable,” McCain said.

The news will disappoint Prime Minister Rishi Sunak, whose ruling Conservative Party is contesting two local elections in England this Thursday. This could also increase the opposition Labor Party’s lead in opinion polls ahead of this year’s national elections.

Suren Thiru, director of economics at the Institute of Chartered Accountants in England and Wales, said: “While we are relieved to have experienced the turmoil of this recession, these figures also confirm that our economy is set to remain in a sustained cycle of stability throughout 2023. Will remain stuck.”

The data also provides an ominous backdrop for the government’s annual budget announcement next month. British Finance Minister Jeremy Hunt is expected to make moderate cuts to some taxes despite a weak economy and skyrocketing levels of public debt.

Hunt said on Thursday that lower growth could be expected due to higher interest rates, which the Bank of England has raised to levels not seen in 26 years to tackle inflation.

Hunt said in a statement, “But there are signs that the British economy is turning a corner… While times remain difficult for many families, we must stick to the plan: to get work and businesses back to building a stronger economy. Cut taxes.”

Despite a mild recession, the British economy has performed much better than many economists had feared a year ago, when many were predicting a much sharper recession.

“It is overly dramatic to characterize the decline in economic activity in the second half of 2023 as a recession, given that employment continued to rise, real wages improved and measures of business and consumer confidence reached levels consistent with increased activity. “Returned at the end of the year,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Slowing inflation and interest rate cuts planned for the end of the year could also boost economic activity, which is already picking up in the key services sector.

Britain’s annual inflation remained unchanged at 4% in January. That’s still double the 2% target set by the Bank of England, but well below the all-time high of 11.1% in October 2022.

The ONS said on Wednesday that food inflation fell to 7% in March 2023 from a recent peak of 19.2%. Compared to the previous month, food prices fell for the first time in more than two years.

Meanwhile, wages have been rising more than prices for seven consecutive months. Excluding bonuses, average pay rose at an annual rate of 6.2% in the three months to December, according to the ONS.

“We believe this is the end of the UK recession, and growth is moving towards positive territory, but slowly,” economists at Nomura wrote in a note on Thursday.

The view that the recovery will be bleak is supported by other ONS data on Thursday, which showed that productivity growth, measured as output per hour, remained flat last year.

–CNN’s Juliana Liu and Junko Ogura contributed reporting.