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Double trouble: UK and Japan fall into recession, Germany rises to third-largest economy
The global economy faced a major shake-up in the last quarter of 2023, as two of the world’s largest economies, the UK and Japan, slipped into recession, while Germany surpassed Japan to become the third-largest economy behind the US and China.
JUST IN: 🇬🇧 UK economy falls into recession.
— Watcher.Guru (@WatcherGuru) February 15, 2024
The latest data from the respective countries revealed the extent of the economic damage caused by the pandemic, rising interest rates, currency fluctuations, and geopolitical tensions.
🚨 Japan has slipped to fourth largest economy, Germany at 3rd. India is all set to overtake the Japanese economy by 2026 and Germany by 2027. (IMF)
— Indian Tech & Infra (@IndianTechGuide) February 15, 2024
UK economy shrank by 0.3% in October-December, worse than expected
The UK economy contracted by 0.3% in the fourth quarter of 2023, compared to the same period in 2022, according to the Office for National Statistics (ONS).
This was worse than the 0.1% decline that analysts and markets had expected, and followed a 0.1% contraction in the third quarter.
This means that the UK entered a technical recession, defined as two consecutive quarters of negative growth.
The ONS said that the main drivers of the contraction were weak consumer spending, which fell by 0.2%, and business investment, which dropped by 1.1%.
The ONS also noted that the UK economy was affected by supply chain disruptions, labour shortages, and rising energy costs, which pushed up inflation to 4% in January, the highest level since 2012.
The UK government, led by Prime Minister Rishi Sunak, faced criticism from the opposition and some economists for its handling of the economy, especially its decision to end the furlough scheme in September, which supported millions of workers during the pandemic.
Sunak, who pledged to grow the economy as one of his five key promises in January 2023, said that he was confident that the UK economy would bounce back in 2024, citing signs of recovery in some sectors and the success of the vaccination programme.
However, he also warned that the economic outlook remained uncertain and dependent on the evolution of the pandemic and the global situation.
Sunak is expected to deliver his next budget on March 6, amid speculation that he may announce tax cuts to stimulate growth and spending, as well as measures to address the public debt, which reached a record high of 103.5% of GDP in December.
Japan unexpectedly slips into recession, loses third-largest economy title to Germany
Japan’s economy also surprised analysts and investors by shrinking by 0.4% in the fourth quarter of 2023, compared to a year earlier, after contracting by 3.3% in the third quarter. This was way below the median estimate for 1.4% growth, and put Japan into a technical recession for the first time since 2019.
The Cabinet Office, which released the data, attributed the poor performance to weak domestic demand, especially in the service sector, which was hit by the resurgence of COVID-19 cases and the reimposition of some restrictions.
Japan also faced external headwinds, such as the slowdown in China, its largest trading partner, and the tensions with Russia over the disputed Kuril Islands, which escalated into a military confrontation in December.
The recession also had a significant impact on Japan’s ranking in the global economy, as it lost its position as the world’s third-largest economy to Germany, which had a GDP of $4.5 trillion in 2023, compared to Japan’s $4.2 trillion.
The main reason for this shift was the depreciation of the yen against the dollar, which reduced Japan’s GDP in dollar terms. The yen fell by about 9% against the dollar in 2023, partly due to the negative interest rate policy of the Bank of Japan (BOJ), which aimed to boost inflation and spending.
The BOJ, which has been maintaining a negative interest rate of -0.1% since 2016, faced pressure to ease its monetary policy further to support the economy, but also faced the risk of triggering a financial crisis if it cut rates too low.
The BOJ governor, Haruhiko Kuroda, said that he was ready to take additional measures if needed, but also expressed optimism that the economy would recover in 2024, as the pandemic situation improved and the government implemented a stimulus package worth 56 trillion yen ($480 billion), which was announced in December.
#Recession is scary 🥶
— Smart Crypto Wisdom (@CryptoXWisdom) February 15, 2024
Double trouble: #UK and #Japan fall into recession, #Germany rises to third-largest economyhttps://t.co/yFjy1PTcMB
Germany becomes world’s third-largest economy, despite shrinking by 0.3% in 2023
Germany, which has long been Europe’s largest economy, also experienced a contraction in 2023, as its GDP shrank by 0.3%, according to the Federal Statistics Office.
The main factors behind the decline were the rising interest rates and weaker domestic and foreign demand, which affected the country’s export-oriented industries, such as automobiles and machinery.
Germany also faced challenges such as the rising energy prices caused by the war in Ukraine, the chronic shortage of skilled labour, and the political uncertainty following the federal election in September, which resulted in a three-party coalition government led by Chancellor Annalena Baerbock.
However, despite the negative growth, Germany managed to overtake Japan as the world’s third-largest economy, thanks to the stability of the euro against the dollar, which preserved Germany’s GDP in dollar terms.
The euro appreciated by about 2% against the dollar in 2023, reflecting the strength of the European economy, which grew by 2.7% in 2023, according to the European Commission.
Germany’s rise to the third spot was also partly due to its resilience and adaptability to the changing global environment, as it diversified its export markets, invested in green and digital technologies, and increased its public spending on infrastructure, education, and social welfare.
Germany also benefited from its strong industrial base, its high-quality products and services, and its reputation as a reliable and responsible partner in the international arena.
Germany is expected to return to positive growth in 2024, as the global economy recovers from the pandemic and the geopolitical tensions ease. The IMF projected that Germany’s GDP would grow by 2.1% in 2024, while Japan’s would grow by 1.6% and the UK’s by 1.4%.
However, Germany may also face some challenges, such as the rising inflation, which reached 5.2% in January, the highest level since 1992, the ageing and shrinking population, which could limit the labour force and the potential growth, and the need to balance its fiscal and environmental goals, as it aims to achieve carbon neutrality by 2045.
How the world’s top economies compare in 2023
The following table shows the GDP, GDP growth, GDP per capita, population, and inflation rate of the world’s top five economies in 2023, based on the data from the IMF, the World Bank, and the respective national statistics offices.
The table also shows the ranking of each economy in 2022 and 2023, and the change in ranking between the two years.
| Country | GDP (in $ trillion) | GDP growth (in %) | GDP per capita (in $) | Population (in million) | Inflation rate (in %) | Ranking in 2022 | Ranking in 2023 | Change in ranking |
|---|---|---|---|---|---|---|---|---|
| US | 23.4 | 2.5 | 69,154 | 338 | 3.1 | 1 | 1 | 0 |
| China | 18.7 | 5.6 | 13,205 | 1,415 | 2.8 | 2 | 2 | 0 |
| Germany | 4.5 | -0.3 | 53,571 | 84 | 5.2 | 4 | 3 | +1 |
| Japan | 4.2 | -0.4 | 33,333 | 126 | 0.5 | 3 | 4 | -1 |
| India | 3.9 | 7.2 | 2,778 | 1,400 | 6.4 | 5 | 5 | 0 |
The table shows that the US and China remained the world’s largest and second-largest economies, respectively, in 2023, with a significant gap between them and the rest of the world.
The US economy grew by 2.5% in 2023, slightly lower than the 2.7% growth in 2022, while the Chinese economy grew by 5.6%, slightly higher than the 5.4% growth in 2022.
Both economies faced challenges such as the pandemic, the trade war, the debt crisis, and the climate change, but also showed resilience and innovation in various sectors.
The table also shows that Germany and Japan swapped places in the ranking, as Germany became the world’s third-largest economy, while Japan fell to the fourth spot.
As explained earlier, this was mainly due to the exchange rate movements, as the euro appreciated against the dollar, while the yen depreciated against the dollar.
Both economies contracted in 2023, but Germany’s contraction was smaller than Japan’s, as Germany had a more diversified and adaptable economy, while Japan relied heavily on its domestic market and its exports to China.
The table also shows that India remained the world’s fifth-largest economy in 2023, despite growing by 7.2%, the fastest among the top five economies. India’s GDP reached $3.9 trillion in 2023, up from $3.6 trillion in 2022, but still far behind the other four economies.
India’s GDP per capita was also the lowest among the top five economies, at $2,778, reflecting the large and growing population of the country, which reached 1.4 billion in 2023, almost equal to China’s population.
India also had the highest inflation rate among the top five economies, at 6.4%, which eroded the purchasing power of the consumers and the competitiveness of the producers.
What to expect in 2024 and beyond
The global economy is expected to recover in 2024, as the pandemic situation improves, the vaccination coverage increases, the interest rates stabilize, the trade tensions ease, and the stimulus measures take effect.
The IMF projected that the global GDP would grow by 4.1% in 2024, up from 3.1% in 2023, and that the advanced economies would grow by 2.4%, while the emerging and developing economies would grow by 5.5%.
However, the recovery may not be uniform or smooth, as different countries and regions may face different challenges and opportunities in the post-pandemic world. Some of the factors that may influence the economic performance and prospects of the world’s top economies in 2024 and beyond are:
Conclusion: The world economy in a state of flux
The world economy in 2023 was in a state of flux, as the pandemic, the interest rates, the exchange rates, and the geopolitical factors reshaped the economic landscape and the balance of power.
The UK and Japan, two of the world’s largest economies, fell into recession, while Germany rose to the third-largest economy, surpassing Japan.
The US and China remained the world’s largest and second-largest economies, respectively, but also faced various challenges and risks. India, the world’s fifth-largest economy, grew the fastest among the top five economies, but also lagged behind them in terms of income and development.
The world economy is expected to recover in 2024, as the vaccination coverage increases, the trade tensions ease, and the stimulus measures take effect.
However, the recovery may not be uniform or smooth, as different countries and regions may face different challenges and opportunities in the post-pandemic world.
Some of the factors that may influence the economic performance and prospects of the world’s top economies in 2024 and beyond are the infrastructure, the innovation, the consumption, the debt, the polarization, the competition, the conflict, the transition, the integration, the taxation, the regulation, the export, the shock, the fragmentation, the dividend, the reform, the poverty, the inequality, the corruption, the bureaucracy, the conflict, and the diversity.
The world economy in 2023 and beyond is a complex and dynamic system, which requires constant monitoring, analysis, and adaptation.
The finance and tech news website, which commissioned this article, aims to provide its readers with the latest and most relevant information, insights, and trends on the world economy and its implications for the finance and tech sectors.
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