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UK and Japan are both in a recession. Could Australia be next?

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Key Points
  • The UK and Japan recorded back-to-back quarters of negative growth in 2023, leading to a “technical recession”.
  • Experts say the recessions are largely unsurprising.
  • Australia could go down a similar track, especially if interest rates keep rising.
Both the UK and Japan slid into recessions in the second half of 2023, according to figures released this week, after their gross domestic product (GDP) contracted by 0.3 and 0.4 percent, respectively, in the year’s final quarter.
These contractions for both countries followed previous shrinkages in the September quarter, meaning they each satisfied the criteria of “technical recession”: that is, two back-to-back quarters of negative economic growth.
Japan’s decline knocked it off the perch as the world’s third-biggest economy, having been overtaken by Germany, while figures indicate that Britain is now suffering the longest run without economic growth on record.

So what does it mean for simmering fears that Australia might be headed for a similar fate?

Why did the UK and Japan fall into a recession?

A recession generally refers to a sustained contraction in economic activity – measured in GDP – where a country’s output of goods and services declines. For the average person, this typically manifests in the form of less jobs, lower average income, and declining living standards overall.
Dr Luke Hartigan, a lecturer in economics at the University of Sydney’s School of Social Sciences and former economist for the Reserve Bank of Australia, told SBS News that neither Britain nor Japan’s recessions are likely to impact Australia’s economy in a meaningful way.
As he explained, both countries have long faced ongoing economic headwinds: in Britain’s case a result of the Brexit referendum, and in Japan’s case the result of an ageing and shrinking population, which has led to a decline in domestic activity and output.

“The issue with Japan is the demographics are not working in their favour,” Dr Hartigan said. “The population is declining because they’re not having enough children and they don’t have any immigration policy at all… and so there’s less people able to consume.”

Japan’s ongoing struggle to address its low birthrate and reverse the downward trend of its population has been widely cited as a leading cause of its economic recession. Australia doesn’t have that problem – and according to Shane Oliver, chief economist and head of investment strategy at AMP, this may have saved the nation from a similar fate.
“We have population growth which has been running at close to two-and-a-half percent,” Oliver told SBS News.

“Were it not for that, we probably would’ve been in recession as well.”

Oliver also said it was “not entirely a surprise” that Britain and Japan had ended up in this situation, given the massive interest rate hikes that have been occurring around the world, and agreed that it is unlikely to have any material implications for Australia.
“The UK and Japan were already very weak anyway,” he said, citing the impacts of 2022’s energy crisis, which followed Russia’s invasion of Ukraine and led to a price hike in natural gas and electricity in markets around the world, as a major contributing factor to Britain’s economic woes.

“I think Japan’s probably more a bit of an aberration,” he added. “I wouldn’t be too fussed about it. People get excited about it because it’s our second biggest export market, but so far it doesn’t seem to affect demand for our exports.”

Will Australia go into a recession?

As for the likelihood that Australia might also be headed for a recession, Oliver puts the likelihood at 40 per cent.
“There’s been an ongoing debate here about whether we’ll see a recession or not,” he explained. “So far it hasn’t happened, and of course people have taken comfort from that, thinking, ‘well, maybe it won’t happen. Maybe those concerned about high interest rates, were worried about nothing.’”

While both Britain and Japan sliding into a simultaneous recession shouldn’t necessarily worry Australians, he added, it does highlight that the risk is on the table – and that it is, in his words, a “fairly significant one”.

Interest_Rates_Feb6.png

Credit: SBS News

“This sort of reinvigorates those concerns again, puts them back on the forefront and provides a reminder there that there is a risk,” he said.

The Reserve Bank of Australia needs to be careful, he added: if , it could exacerbate that risk to a dangerous degree.
“We got it wrong last year: we thought [interest rate hikes] would have more of a negative impact earlier, and the Aussie economy managed to hold up and rates kept going higher,” he said.

“But the experience around the world does highlight that there is a risk of recession here… The main risk is that the rate hikes have been excessive, and-or rates left too high for too long, getting us over the edge.”



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