June 16, 2024

Indian economy a ‘bright spot’ while Japan, UK fall into technical recession: What this means for the global market?

Japan has unexpectedly slipped into a recession after shrinking for a second quarter due to sluggish domestic demand and has lost its position as the world’s largest economy to Germany. This comes after the United Kingdom (UK) also dipped into a recession at the end of last year, undercutting Prime Minister Rishi Sunak’s claim to be growing the economy in the run-up to a general election.

On the other hand, the world’s largest democracy still shines as a ‘bright spot’ on the global map, despite geopolitical conflicts and economic headwinds. India retains its position as the fastest growing nation in the world. The International Monetary Fund (IMF) said in its latest World Economic Outlook update the economic growth in India was projected to remain strong at 6.5 per cent in both 2024 and 2025.

Also Read: IMF projects strong India growth in 2024, says global ‘soft landing’ in sight

But what happened in Japan and the UK – both of which have long dominated as front-runners in the global economic landscape? And how could it affect the global market footprint in the near-term? Let’s take a closer look:

What is recession?

A recession is commonly defined a period of two consecutive quarters of contraction. Recessions may last as little as a few months, but the economy may not recover to its former peak for years. The real gross domestic product (GDP) 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.

Usually, unemployment often remains high well into an economic recovery, so the early stages of a rebound can feel like a continuing recession for many. An economy goes into recession on weak domestic demand, elevated inflation rates, lower industrial output, surge in crude oil prices, among others.

What happened in UK?

Britain’s GDP fell 0.3 per cent in the fourth quarter, more than the 0.1 per cent drop economists forecast, according to the Office for National Statistics data. This followed an unrevised 0.1 per cent decline in the previous three months.

The output of every main sector in the economy fell in the final quarter of 2023, said Liz McKeown, ONS director of economic statistics, ‘with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery’.

Sunak made growing the economy one of five key pledges last year. However, the ONS figures show that the UK stagnated in his first full year as prime minister. Fourth quarter GDP was down 0.2 per cent compared to a year earlier and growth was just 0.1 per cent in 2023 as a whole.

The figures indicate the pressure households are under, with the Bank of England’s (BoE) decision to hold interest rates at a 14-year high meaning the cost of borrowing and mortgages are still high. Also, the fall in Britain’s economic output in the final quarter of 2023 was the biggest drop since the start of 2021, at the height of the pandemic.

Also Read: Germany overtakes Japan as land of rising sun enters recession

State of Japan’s economy

Japan GDP contracted at an annualized pace of 0.4 per cent in the final three months of last year, following a revised 3.3 per cent retreat in the previous quarter, the Cabinet Office reported on Thursday.

The report showed both households and businesses cut spending for a third straight quarter as Japan’s economy slipped to fourth-largest in the world in dollar terms last year. The Bank of Japan (BoJ’s) policy board has recently ramped up discussions surrounding an exit from the subzero rate policy and sought to assure markets that a rate hike wouldn’t signal a sharp shift in policy.

Japanese Finance Minister Shunichi Suzuki said on Friday that monetary policy including whether and when the central bank may end its negative interest rate policy was up to the BoJ to decide.

“I am aware there are various opinions in the market,” Suzuki told reporters when asked if weak gross domestic product data may affect the timing of an end to negative rates, which many investors expect to happen in March or April.

For the full year, Japan’s nominal GDP amounted to about $4.19 trillion, based on the dollar-yen rate at the end of the year. Germany’s 2023 GDP was equivalent to roughly $4.55 trillion, based on the year-end euro-dollar rate. India’s economy is set to overtake Japan’s and Germany’s in coming years, according to the IMF.

Impact on global markets

Foreign investors increased their purchases of Japanese stocks last week as easing concerns over the BoJ’s potential policy shift buoyed market sentiment. According to data from Japanese exchanges, foreigners accumulated a net 817.43 billion yen ($5.44 billion) of local stocks in the week to February 9, marking their most substantial weekly net purchase since January 12.

They purchased 451.06 billion yen of derivative contracts after two successive weeks of net selling, in addition to securing about 366.37 billion yen of cash equities. The Nikkei surged 2.05 per cent last week, marking its biggest gain since January 12.

Also Read: Japan’s Nikkei hits 34-year peak, nears all-time high level

On Friday, it closed at 38,487.24, positioning itself to potentially test the all-time high of 38,957.44 reached in December 1989. Japanese stocks are being boosted by a weak yen, which is being pushed down by Japan’s central bank reluctance to raise interest rates as it tries to emerge from decades of deflation.

The UK by contrast, is suffering from inflation that is still at twice the Bank of England’s target despite the economic slump. From a longer-term perspective, UK and Japanese stocks have diverged greatly. The FTSE 100 is down 5.5 per cent over the past 12 months, while the Nikkei has surged 38 per cent. By comparison, the S&P 500 is up 21 per cent over the past year.

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