UK, Japan economies fall into recession

Rishi Sunak misses key targets

The United Kingdom and Japan fell into recession during the final three months of last year, official figures show, after the two economies shrank by more than expected.

UK's Gross Domestic Product, a key measure of economic activity, dropped by 0.3 per cent

It follows a fall between July and September. The UK is considered to be in recession if GDP falls for two successive three-month periods.

Japan has unexpectedly fallen into a recession after its economy shrank for two quarters in a row.

The country's gross domestic product (GDP) contracted by a worse-than-expected 0.4 per cent in the last three months of 2023, compared to a year earlier.

It came after the economy shrank by 3.3 per cent in the previous quarter.

It raises questions over whether Prime Minister Rishi Sunak has met his pledge to grow the economy.

It was one of five promises that the Prime Minister made in January 2023. However, it is not clear what measure the government will use to determine whether Sunak has kept his pledge or not.

For the whole of 2023, the economy grew by 0.1 per cent

Nevertheless, excluding the Covid years, that annual growth figure is the weakest since 2009 when the UK and major economies were reeling from the global financial crisis.

Shadow chancellor Rachel Reeves said the data showed that Sunak's pledge to grow the economy was "in tatters".

Meanwhile, Chancellor Jeremy Hunt is less than three weeks away from unveiling his latest Budget.

The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.

If GDP is going up steadily, people pay more in tax because they're earning and spending more. This means more money for the government that it can choose to spend on public services, such as schools, police and hospitals.

Governments also like to keep an eye on how much they are borrowing in relation to the size of the economy.

Treasury sources have confirmed that the chancellor is looking at a larger pencilled-in squeeze on public spending as a way to deliver tax cuts in the Budget on 6 March.

Forecasts for the public finances have materially deteriorated in recent weeks as interest costs on UK government borrowing has increased. Final decisions have not been made.

Figures from the Office for National Statistics (ONS) showed that during the final three months of last year, there was a slowdown in all the main sectors it measures to determine the health of the economy, including construction and manufacturing.

The figure for the final three months of last year was worse than a 0.1 per cent fall widely forecast by financial markets and economists.

GDP for the third quarter, between July and September fell by 0.1 per cent

Recent figures showed that inflation, which measures the pace of price rises, remained at four per cent in January. That is twice the Bank's 2% target.

The Bank of England had been lifting interest rates to put the brakes on inflation but has kept them at 5.25 per cent since August last year.

The figures from Japan's Cabinet Office also indicate that the country has lost its position as the world's third-largest economy to Germany.

Economists had expected the new data to show that Japan's GDP grew by more than one per cent in the fourth quarter of last year.

The latest figures were the first reading of Japan's economic growth for the period and could still be revised.

Two quarters in a row of economic contraction are typically considered the definition of a technical recession.

In October, the International Monetary Fund (IMF) forecast that Germany was likely to overtake Japan as the world's third-largest economy when measured in US dollars.

The IMF will only declare a change in its rankings once both countries have published the final versions of their economic growth figures. It began publishing data comparing economies in 1980.

Economist Neil Newman told the BBC that the latest figures show that Japan's economy was worth about $4.2 trillion (£3.3trillion) in 2023, while Germany's was $4.4 trillion.

This was due to the weakness of the Japanese currency against the dollar and that if the yen recovers, the country could regain the number three spot, Newman added.