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Japan slips into a recession, now world’s fourth-largest economy
TOKYO | Japan’s economy is now the world’s fourth-largest after it contracted in the last quarter of 2023 and fell behind Germany.
The government reported the economy shrank at an annual rate of 0.4% in October to December, according to Cabinet Office data on real GDP released Thursday, though it grew 1.9% for all of 2023. It contracted 2.9% in July-September. Two straight quarters of contraction are considered an indicator an economy is in a technical recession.
Japan’s economy was the second largest until 2010, when it was overtaken by China’s. Japan’s nominal GDP totaled $4.2 trillion last year, while Germany’s was $4.4 trillion, or $4.5 trillion, depending on the currency conversion.
A weaker Japanese yen was a key factor in the drop to fourth place, since comparisons of nominal GDP are in dollar terms. But Japan’s relative weakness also reflects a decline in its population and lagging productivity and competitiveness, economists say.
Real gross domestic product is a measure of the value of a nation’s products and services. The annual rate measures what would have happened if the quarterly rate lasted a year.
Japan was historically touted as “an economic miracle,” rising from the ashes of World War II to become the second largest economy after the U.S.. It kept that going through the 1970s and 1980s. But for most of the past 30 years the economy has grown only moderately at times, mainly remaining in the doldrums after the collapse of its financial bubble began in 1990.
Both the Japanese and German economies are powered by strong small and medium-size businesses with solid productivity.
Like Japan in the 1960s-1980s, for most of this century, Germany roared ahead, dominating global markets for high-end products like luxury cars and industrial machinery, selling so much to the rest of the world that half its economy ran on exports.
But its economy, one of the world’s worst performing last year, also contracted in the last quarter, by 0.3%.
Britain’s likewise contracted late last year. Britain reported Thursday that its economy entered a technical recession in October-December, shrinking 0.3% from the previous quarter. The quarterly decline followed a 0.1% fall in the previous three-month period.
As an island nation with relatively few foreign residents, Japan’s population has been shrinking and aging for years, while Germany’s has grown to nearly 85 million, as immigration helped to make up for a low birth rate.
The latest data reflect the realities of a weakening Japan and will likely result in Japan’s commanding a lesser presence in the world, said Tetsuji Okazaki, professor of economics at the University of Tokyo.
“Several years ago, Japan boasted a powerful auto sector, for instance. But with the advent of electric vehicles, even that advantage is shaken,” he said. Many factors have yet to play out, “But when looking ahead to the next couple of decades, the outlook for Japan is dim.”
The gap between developed countries and emerging nations is shrinking, with India likely to overtake Japan in nominal GDP in a few years.
The U.S. remains the world’s largest economy by far, with GDP at $27.94 trillion in 2023, while China’s was $17.5 trillion. India’s is about $3.7 trillion but growing at a sizzling rate of around 7%.
Immigration is one option for solving Japan’s labor shortage problem, but the country has been relatively unaccepting of foreign labor, except for temporary stays, prompting criticism about discrimination and a lack of diversity.
Robotics, another option, are gradually being deployed but not to the extent they can fully make up for the lack of workers.
Another key factor behind Japan’s sluggish growth is stagnating wages that have left households reluctant to spend. At the same time, businesses have been invested heavily in faster growing economies overseas instead of in the aging and shrinking home market.
Private consumption fell for three straight quarters last year and “growth is set to remain sluggish this year as the household savings rate has turned negative,” Marcel Thieliant of Capital Economics said in a commentary. “Our forecast is that GDP growth will slow from 1.9% in 2023 to around 0.5% this year.”
UK fell into recession at the end of 2023
LONDON | The British economy fell into recession at the end of 2023 for the first time since the onset of the coronavirus pandemic, as output shrank more than anticipated in the final three months of the year, official figures showed Thursday.
In what is a blow for the governing Conservative Party ahead of a general election this year, the Office for National Statistics estimated that economic activity, as measured by gross domestic product, declined by 0.3% in the fourth quarter of the year from the previous three-month period. It said all three main sectors — services, industrial production and construction — were down.
That was far more than the 0.1% decline anticipated by economists.
The quarterly decline followed a 0.1% fall in the previous three-month period and highlights how the economy has been hobbled by high interest rates that have been raised to reduce inflation.
A recession is officially defined as two straight quarters of economic decline.
It is the first time the British economy has fallen into recession since the first half of 2020, when output dived during the country’s first COVID-19 lockdown.
Being in recession — however modest — is hardly the ideal backdrop for Prime Minister Rishi Sunak as he mulls when to call the election. Opinion polls show that his Conservative Party is heavily trailing the main opposition Labour Party.
Treasury chief Jeremy Hunt blamed high inflation for the weakness of the economy, which has eaten into living standards.
“Low growth is not a surprise,” he said. “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.”
In a budget statement next month, Hunt is expected to try to turn the political momentum back for the Conservatives by cutting taxes, though with public finances stretched, government spending may have to be trimmed too.
Rachel Reeves, who would replace Hunt at the Treasury if Labour wins the election, sought to point the finger directly at Sunak and “14 years of economic decline” under the Conservatives.
“This is Rishi’s recession and it is the British people who will pay the price,” she said.
One of the main reasons why the economy has stagnated is that the Bank of England has raised its main interest rate aggressively to a 16-year high of 5.25% to get inflation down to 4% from a peak of over 11%. Higher interest rates help cool the economy by making it more expensive to borrow, thereby bearing down on spending.
Though interest rates appear to have peaked, the central bank has expressed caution about cutting interest rates too soon as lower borrowing rates may bolster spending and put renewed upward pressure on prices. As a result, borrowing costs are expected to stay high, relative to the past 15 years or so, and growth muted, whenever the election comes.
“The big picture is that Britain remains a stagnation nation, and that there are precious few signs of a recovery that will get the economy out of it,” said James Smith, research director at the Resolution Foundation think tank.
U.S. applications for jobless benefits fall
Fewer Americans filed for jobless claims last week as the labor market continues to show resilience in the face of elevated interest rates intended to cool economic growth in the U.S.
Applications for unemployment benefits fell by 8,000 to 212,000 for the week ending Feb. 10, the Labor Department reported Thursday.
The four-week average of claims, which quiets some of the week-to-week noise, rose by 5,750 to 218,500, up from 212,750 the previous week.
Weekly unemployment claims are seen as a proxy for the number of U.S. layoffs in a given week. They have remained at extraordinarily low levels despite efforts by the U.S. Federal Reserve to cool the economy.
The Federal Reserve raised its benchmark rate 11 times beginning in March of 2022 in an effort to bring down the four-decade high inflation that took hold after the economy roared back from the COVID-19 recession of 2020.
Though inflation has eased considerably in the past year, the Labor Department reported earlier this week that consumer prices remain well above the Fed’s 2% target.
The Fed has left rates unchanged at its last four meetings.
As the Fed rapidly jacked up rates in 2022, most analysts predicted that the U.S. economy was bound for a recession. But the economy and the job market remained surprisingly resilient.
U.S. employers delivered a stunning burst of hiring to begin 2024, adding 353,000 jobs in January in the latest sign of the economy’s continuing ability to shrug off the highest interest rates in two decades.
Last month’s job gain — roughly twice what economists had predicted — topped the December gain of 333,000, a figure that was revised sharply higher. The unemployment rate stayed at 3.7%, and has been below 4% for 24 straight months — two full years — the longest such streak since the 1960s.
Though layoffs remain at low levels, there has been an uptick in job cuts recently across technology and media. Google parent company Alphabet, eBay, TikTok, Snap and the Los Angeles Times have all recently announced layoffs. On Wednesday, Cisco Systems announced it was cutting 4,000 jobs.
Outside of tech and media, UPS, Macy’s and Levi’s also recently cut jobs.
In total, 1.9 million Americans were collecting jobless benefits during the week that ended Feb. 3, an increase of 30,000 from the previous week and the most since November.
Average long-term U.S. mortgage rate rose this week
LOS ANGELES | The average long-term U.S. mortgage rate rose this week to its highest level in 10 weeks, a setback for prospective homebuyers ahead of the spring homebuying season.
The average rate on a 30-year mortgage rose to 6.77% from 6.64% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.32%.
Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, also rose this week, pushing the average rate to 6.12% from 5.90% last week. A year ago it averaged 5.51%, Freddie Mac said.
The increase in rates echoes moves in the 10-year Treasury yield, which lenders use as a guide to pricing loans. Stronger-than-expected reports on inflation, the job market and the overall economy have stoked worries among bond investors that the Federal Reserve will wait longer before it begins cutting interest rates.
Hopes for such cuts amid signs that inflation has declined from its peak two summers ago has been a major reason the 10-year Treasury yield has mostly pulled back since October, when it climbed to its highest level since 2007.
Investors’ expectations for future inflation, global demand for U.S. Treasurys and what the Fed does with interest rates can influence rates on home loans.
“The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season,” said Sam Khater, Freddie Mac’s chief economist.
So far this year, mortgage applications to buy a home are down in more than half of all states compared to a year earlier, noted Khater.
When mortgage rates rise, they can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford in a market already out of reach for many Americans. They also discourage homeowners who locked in rock-bottom rates two or three years ago from selling. The average rate on a 30-year mortgage remains sharply higher than just two years ago, when it was 3.92%.
The cost of financing a home has come down from its most recent peak in late October, when the average rate on a 30-year mortgage hit 7.79%, the highest level since late 2000.
Many economists have projected that mortgage rates will continue heading lower this year, though forecasts generally have the average rate on a 30-year home loan hovering around 6% by the end of the year.
Elevated mortgage rates and a dearth of available homes have kept the U.S. housing market mired in a slump the past two years. Sales of previously occupied U.S. homes sank to a nearly 30-year low last year, tumbling 18.7% from 2022.
—From AP reports
