Japan unexpectedly slips into recession, Germany now world's third-biggest economy
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Britain's economy 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 expected 2024 election.
The Office for National Statistics (ONS) said that 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.
A Reuters poll of economists had pointed to a smaller 0.1% fall in the October-to-December period.
The fall in GDP in the fourth quarter was the biggest since the first quarter of 2021, the ONS said.
Britain's economy has been stagnating for nearly two years. The Bank of England has said it expects it to pick up slightly in 2024.
"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 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 March 6 budget, if penned in by tight finances.
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.
Sterling weakened moderately against the dollar and the euro shortly after the GDP data release.
The ONS said the manufacturing, construction and wholesale sectors were the largest contributors to the decrease in GDP.
Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world's third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.
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 (7203.T), open new tab all points to a challenging path to economic recovery and policymaking.
"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."
Japan's gross domestic product (GDP) fell an annualized 0.4% in the October-December period after a 3.3% slump in the previous quarter, government data showed on Thursday, confounding market forecasts for a 1.4% increase.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2% target.
"Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin," said Stephan Angrick, senior economist at Moody's Analytics.
"This makes it harder for the central bank to justify a rate hike, let alone a series of hikes."
Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as "lacking momentum" due to rising prices.
"Our understanding is that the BOJ looks comprehensively at various data, including consumption, and risks to the economy in guiding monetary policy," he told a news conference after the data's release when asked about the impact on BOJ policy.
The yen was steady after the data and last stood at 150.22 per dollar, pinned near a three-month low hit earlier in the week.
Yields on Japanese government bonds fell after the data as some traders pushed back bets of an early BOJ policy shift. The benchmark 10-year yield slid 4 basis points to 0.715%. The Nikkei (.N225), opens new tab stock average rallied to 34-year highs, with the data further underpinning recent reassurances from the BOJ that borrowing costs will stay low even after ending negative rates.
"Weak domestic demand makes it hard for the BOJ to pivot towards monetary tightening," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. "The hurdle for ending negative rates in March has risen."
Private consumption, which makes up more than half of economic activity, fell 0.2%, versus market forecasts for a 0.1% gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.
Capital expenditure, another key private-sector growth engine, fell 0.1%, compared with forecasts of a 0.3% gain.
Both consumption and capital expenditure shrank for the third straight quarter.
Big companies expect to increase capital expenditure by hefty 13.5% in the year ending in March, a quarterly survey showed. But analysts point to a delay in actual investment due to rising raw material costs and labour shortages.
The most recent machinery orders data, regarded as a leading indicator of capital spending, showed a contraction in November and cast doubt on the BOJ's view that robust investment will underpin the economy.
External demand, or exports minus imports, contributed 0.2 percentage point to GDP as exports rose 2.6% from the previous quarter.
Reuters Graphics
The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework, but is likely to go slow on any subsequent policy tightening amid lingering risks, sources have told Reuters.
An exit from accommodative policy would come at a time the U.S. Federal Reserve is pausing after aggressive interest rate hikes, and is widely expected to reduce borrowing costs this year.
The International Monetary Fund revised up its global growth forecast in January as the outlook for the United States and China brightened, but warned of risks including geopolitical tensions in the Middle East.
While BOJ officials have not offered clues on when they could end negative rates, many market players expect it to happen either in March or April. A Reuters poll taken in January showed April as the top choice among economists for the negative rate policy to be abandoned.
Some analysts say Japan's tight labour market and robust corporate spending plans are keeping alive the chance of an early exit from ultra-loose policy.
"The (BOJ) has been arguing that private consumption has 'continued to increase moderately' and we suspect that it will continue to strike an optimistic tone at its upcoming meeting in March," said Marcel Thieliant, head of Asia-Pacific at Capital Economics, sticking to his projection the bank will end its negative interest rate policy in April.
Faced with diminishing job prospects as the economy slows, Chu Yi is choosing to "lie flat", a Chinese term used to describe people who work just enough to afford to spend their time on what they enjoy.
The Shanghai-based 23-year-old used to work at a fashion company, but said she quit her job two years ago because she had to frequently work overtime and she hated her boss.
Chu now works from home just one day a week for a travel company, which gives her ample time to practice tattooing as part of a six-month apprenticeship towards becoming a full-time tattoo artist.
And she is not alone in "lying flat": although there is no data on how many young Chinese are opting out of corporate jobs that they traditionally would have taken, the youth jobless rate rose to a record high of 21.3% in June 2023 amid an economy still struggling to return to pre-pandemic growth levels, and several Chinese college graduates have said that they are trading down to find a source of income.
"For me, there is not much meaning to work," Chu said. "Most of it seems to be finishing work for your manager and making your manager happy. So I decided I don't want to work."
There are around 280 million young Chinese who like Chu are born between 1995-2010, and surveys show that Generation Z is the most pessimistic of all age groups in the country.
Pacifying this generation amid some of the slowest economic growth in nearly half a century presents a key policymaking challenge for Chinese President Xi Jinping, and last month the human resources ministry said more efforts were needed to prop up employment in 2024, especially for the youth.
Zhou Yun, an assistant professor of sociology at the University of Michigan, said that while it may seem that some youth were opting out of the corporate rat race, it was impossible to overlook their pessimism about the future.
As China's economy slows and the labour market remains tight, it is "profoundly challenging for young people to navigate rigid social inequalities, tightening political control and dim economic prospects," Zhou said.
All this combined is making young people like Chu prioritise their own well-being and interests over what she called the "unending pressure" of corporate work. Chu said that she was much happier now and believed her choice was "worthwhile".
"My current salary, even though it's not a lot, is enough to cover my daily costs. Free time is worth much more than several thousand yuan," she said.
