It was announced, as of February 15, 2024, that two of the most advanced economies in the world, notably the United Kingdom and Japan, have officially entered a recession. The officialization of this announcement is based on a decline in both countries’ GDP for two consecutive quarters in 2023.
The U.K.’s Office for National Statistics reported that GDP decreased by 0.3% in the final three months of 2023. The U.K.’s recession is the “deepest” since 1955 when quarterly data began being published. Japan’s recession, on the other hand, was unexpected, and it may have caused Japan to lose its status as the world’s third-largest economy to Germany. What has led these two giants to enter into a recession?
Let’s first start with the United Kingdom. Several factors have contributed to this economic downturn. First, high inflation. Indeed, inflation, particularly driven by energy prices due to the global energy crisis and the war in Ukraine, has significantly eroded household spending power and increased business costs. Moreover, central banks, including the Bank of England, have raised interest rates to combat inflation. While necessary, these hikes can dampen economic activity and investment. Recessionary trends in other major economies, especially the Eurozone, have also weakened demand for UK exports.
Let’s now move on to Japan. Similar to the UK, inflation driven by global energy prices and the war in Ukraine has impacted household spending and business costs. However, The Bank of Japan (BOJ) has kept interest rates low to stimulate the economy, but global trends may lead to future increases, impacting investment and growth. More importantly, The significant weakening of the Japanese Yen has made imports more expensive, further fueling inflation and impacting consumer confidence. Consumer spending has remained stagnant due to various factors, including wage stagnation and concerns about the future, such as an aging population and a declining workforce.
This now begs the question to know if the United States would be the next economic power to entering a recession. Economists are obviously divided on the issue, and arguments have been made on both sides.
Those who believe that a recession in the United States is imminent, argued that the Fed has been raising interest rates to combat inflation, which can slow down economic growth and increase the risk of a recession. They also argued that the yield curve, which shows the interest rates on government bonds of different maturities, has inverted recently. This is often seen as a signal of a future recession.
Those who do not believe that a recession in the U.S. is imminent, based their arguments on the fact that the U.S. labor market is still strong. They contend that the unemployment rate remains low, and job growth has been steady, which suggests that the economy is still on solid footing. Furthermore, they stipulate that consumer spending has been resilient on the face of inflation, which is a good sign for the economy.
According to Statista, there is a 62.94% chance of a recession in the United States by December 2024. Economist David Rosenberg has said that the United States has an 85% chance of a recession in 2024, which is the highest probability since the Great Financial Crisis of 2008. We are still in the beginning of the year, and it is more likely that the Feds will cut interest rates than maintaining them at high levels. And cutting interest rates is a sign of improved economic conditions.