investor daily logo

Could Japan and UK recessions affect Australia?

By Rhea Nath
5 minute read

Given much furore around the Asian giant at the start of the year, a surprising technical recession has left market watchers concerned.

Japan and the UK both slipped into recession at the end of last year, but for very different reasons.

A recession was officially declared in Japan last week, after the economy contracted at an annual rate of 0.4 per cent in October to December, following a contraction of 3.3 per cent in the previous quarter, according to official statistics.

Two consecutive quarters of contraction are considered as an economic indicator of a technical recession.

The decline in GDP has been attributed to a weakening yen against the dollar, alongside weak domestic demand and an ageing, shrinking population.

The weak yen is an aftereffect of the country’s ongoing deflation issue, with the central bank reluctant to raise the interest rate for fear of lowering inflation further. A weak yen has, however, boosted Japanese stocks putting the country on the radar of investors.

In the UK, however, inflation is still double the Bank of England’s target, with the bank said to be waiting for firm evidence that inflation is under control before bringing rates down.

Last week, Gita Gopinath, deputy managing director at the International Monetary Fund (IMF), opined that Japan’s historically weak domestic demand was looking to come to an end, with economic growth expected to hit 1 per cent in 2024.

Speaking at an IMF press conference on Tuesday, 6 February, she said: “The output gap closed in mid-2023, meaning that demand is now aligned with the economy’s capacity.

“We project 1 per cent growth in 2024. This is up slightly from our most recent World Economic Outlook update, thanks to stronger government spending.”

She said achieving sustained 2 per cent inflation was looking “increasingly likely” as price increases were broad-based across goods and services for the first time in around 30 years.

Unlikely impact on Australia

Reflecting on the news, GSFM investment strategist Stephen Miller believes recessions in Japan and the UK are unlikely to play a pivotal role in determining whether Australia slips into recession.

“What we can say without fear of contradiction is that it doesn’t help. It doesn’t help that it comes at a time when there are certainly a number of challenges facing China and they seem to be mounting,” he told InvestorDaily.

“It doesn’t help, particularly at a time when there are some ‘straws in the wind’, so to speak, that the economy in Australia softening, and maybe beyond the already fairly tepid outlook that the Reserve Bank of Australia has put onto the table.”

For Mr Miller, sluggish economic growth globally could mean that “perhaps the RBA is more proximate to cutting rates” than many economists had earlier assumed.

At the start of the year, a number of investment managers had pinpointed Japan as a “bright spot” for investment opportunities.

On a recent episode of the Relative Return podcast, Matthew Haupt, lead portfolio manager of WAM Leaders, observed that Japan, once a closed shop, was now welcoming foreign investors.

Similarly, abrdn highlighted attractive top-down and bottom-up factors are underpinning the equities market in the country, as Japanese companies prioritise profitability and capital return.

No doubt the news of a technical recession in Japan would take markets by surprise, Mr Miller observed.

“It’s certainly taken the market by surprise and it certainly puts a question mark against the widespread expectation that Japan will try and exit its zero-interest rate policy or period of extraordinary monetary accommodation, which we all thought was going to happen in 2024,” he said.

“Whilst we want to be careful about drawing too dramatic a conclusion from that number [GDP], it upset some of the more positive prognosis regarding Japan at the start of the year.”

He suggested that perhaps the surprise recession will push market watchers to refrain from forecasting some form of monetary tightening in the near term.

Shane Oliver, head of investment strategy and chief economist at AMP, also noted that Japan’s predicament serves as a reminder that global recession risks continue to lurk beneath the surface.

However, he believes the tepid figures coming out of Japan and the United Kingdom are unlikely to have a dramatic impact on the Australian economy.

“[Japan and the UK] were already pretty weak having contracted in the September quarter, so it’s unlikely to impact demand for our exports,” he told InvestorDaily.

Japan is “often in and out of recession”, he observed, and is likely to bounce back this quarter. The UK story, he noted, is somewhat different, given the UK was hit hard by last year’s energy shock and a bigger rise in interest rates.

Dr Oliver, however, opined that were it not for super strong population growth of around 2.4 per cent, “Australia would already be in recession because per capita GDP fell in the June and September quarters”.

“The UK with population growth last year around 0.3 per cent and Japan with a 0.5 per cent fall in its population last year do not have that source of demand support!

“We continue to see the risk of a traditional recession in the US and Australia at around 40 per cent.”