Japan, UK Slip Into Recession; What About the US?

How much could lower global growth hurt the U.S. economy?
Japan, UK Slip Into Recession; What About the US?
Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound, and Chinese 100-yuan banknotes are seen in an illustration on Jan. 21, 2016. (Jason Lee/Reuters)
Andrew Moran
News Analysis

Japan and the United Kingdom have joined the growing list of economies slipping into recession, and now economists are debating if the United States could soon become the next victim of economic forces.

Tokyo recorded back-to-back quarters of gross domestic product (GDP) contraction. In the third quarter, the Japanese economy fell 0.8 percent and then slid 0.1 percent in the fourth quarter. The development also knocked Japan off its pedestal as the world’s third-largest economy, with Germany now taking that spot.

The UK is also entrenched in a technical recession. Its GDP slumped 0.1 percent in the July-to-September span and declined 0.3 percent in the final three months of 2023.

Other countries officially in recession include Denmark, Estonia, Finland, Ireland, and Luxembourg.

For now, many economists and market observers don’t believe that the headwinds in Asia or Europe will influence the United States.

While U.S. exports to both continents have risen in recent years, a drop in foreign demand might not be enough to weigh on the world’s largest economy. The United States exports between $70 billion and $80 billion in goods to Japan each year. In the past two years, the United States has bolstered shipments of goods to the UK, climbing above $70 billion for the first time.
Even a strengthening greenback has yet to make a dent in foreign trade. The U.S. Dollar Index, a gauge of the buck against a basket of currencies, is already up roughly 3 percent year-to-date and remains at its highest level in about 20 years. While a stronger dollar makes it cheaper to import, it has hampered developing economies’ growth prospects, particularly as Asian countries engage in currency depreciation.
Will the United States avert a downturn, or has speculation of the recession’s demise been far off the mark?

Recession Talk in the US

The U.S. economy has averted a downturn despite economists and market analysts forecasting a recession for more than a year.

In the third and fourth quarters, GDP growth rates were 4.9 percent and 3.3 percent, respectively. Looking ahead to the first quarter, estimates point to comparable expansion.

But now that two of the world’s largest economies are entrenched in a recession, is the United States next?

Recession risks have been ubiquitous since the Federal Reserve launched its quantitative tightening campaign in March 2022, a policy mixture of raising interest rates and reducing the balance sheet. However, in recent months, the Fed and economists have trimmed their recession expectations and championed the soft-landing narrative.

“There’s little basis for thinking that the economy is in a recession now. I think there’s always a probability that there will be a recession in the next year,” Fed Chair Jerome Powell told reporters at the post-Federal Open Market Committee meeting news conference in December.

The Wall Street Journal’s survey of academic and business economists lowered the probability of a recession within the next year to 39 percent from 48 percent, writing that “it won’t be a recession, it will just feel like one.”

Carsten Brezski, global head of macro at ING, has called the U.S. economy “a small economic miracle—or conundrum” that hasn’t ceased to surprise economists.

“We’re throwing the recession towel in the ring and believe that the U.S. consumer would rather tap his or her savings than reduce spending,” he wrote in a note.

“Sometimes it is the small things that give hope and pleasure. There are still too many risks out there, economic and geopolitical, to become overly enthusiastic, but after months of downward revisions, let’s cherish the moment: some tentative optimism is back.”

While there is still a chance the United States could fall into a recession this year, “the Fed’s soft landing appears to be more and more the likely outcome,” according to Ben Kirby, co-head of investments and co-portfolio manager at Thornburg Investment Management.

“The Fed deserves a Nobel Prize for their work,” Mr. Kirby said in a recent note. “Chair Powell has managed interest rate moves and wrestled inflation down nearly to their target. The Fed naysayers have been wrong time and time again, particularly those who believed the U.S. was already in a recession last year.”

With the lag effect of monetary policy and recent anemic figures, a chorus of experts argues that the United States could face a slow-growth year.

The Conference Board abandoned its long-held recession call and now anticipates GDP growth to slow to less than 1 percent in the second and third quarters.

“Thereafter, inflation and interest rates should normalize, and quarterly annualized GDP growth should converge toward its potential of near 2 percent in 2025,” CB economists wrote.

Daniel Bachman, the senior manager at Deloitte Services, says the baseline scenario is growth easing to around 1.5 percent this year and inflation moderating to below 3 percent by 2025.

“This long-desired ’soft landing' is accompanied by a stable labor market, despite slowing job growth,” he wrote.

The White House doesn’t believe the United States is the next domino to fall in the global economy.

Director of the National Economic Council Lael Brainard speaks during the daily press briefing at the White House in Washington on June 27, 2023. (Madalina Vasiliu/The Epoch Times)
Director of the National Economic Council Lael Brainard speaks during the daily press briefing at the White House in Washington on June 27, 2023. (Madalina Vasiliu/The Epoch Times)

Speaking to reporters at an economic policy conference on Feb. 16, National Economic Council director Lael Brainard asserted that the slowdown in inflation and resilient consumer spending could result in a climate that is “quite benign.”

“The evidence is increasingly clear that we have achieved a strong, broad-based recovery, while inflation has fallen rapidly towards its 2 percent target,” Ms. Brainard said in prepared remarks, adding that recent improvements in the labor force and business investment have facilitated growth over the longer term.

“In the president’s words, this is the kind of bottom-up, middle-out growth that provides working families more breathing room and more opportunity.”

What Recent Numbers Show

The Federal Reserve’s inflation fight has progressed, though recent indicators emphasize the concern that it is sticky and stubborn.

The annual inflation rate eased to 3.1 percent in January, but it was higher than economists’ expectations of 2.9 percent. The core consumer price index (CPI), which omits the volatile energy and food sectors, was unchanged at a higher-than-expected 3.9 percent. Additionally, producer prices ticked up last month, rising 0.3 percent, higher than the consensus estimate of 0.1 percent. The core producer price index jumped 0.5 percent.

Aside from elevated price pressures, economists warn that pockets of weakness could be forming.

Last month, retail sales tumbled 0.8 percent, worse than the market forecast of 0.1 percent. The slowdown in retail trade was seen across the board, including building material and garden equipment, gasoline stations, electronic and appliance stores, and apparel. This was the worst performance since March, driven by the holiday hangover and frigid temperatures.

Credit card debt hit a fresh record high in the fourth quarter of 2023. New data from the New York Fed show that consumer borrowing costs rose 24 basis points last quarter to 9.38 percent, the highest reading since the final three months of 2000. Delinquencies have rocketed.

With consumption representing two-thirds of the national economy, a slump in household spending could be a leading factor in slower growth in the year ahead, experts note.

Moreover, industrial and manufacturing production dropped 0.1 percent and 0.5 percent, respectively.

Looking ahead, early forecasts point to another quarter of robust growth.

According to the Atlanta Fed GDPNow model, growth is expected to be around 3 percent in the January-to-March period. The New York Fed Staff Nowcast has penciled in a 3.3 percent reading.
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
Related Topics