Daily News Portal

Japan and the UK are in recessions. Is the US next? | CNN Business


Ash Ponders/Bloomberg/Getty Images

Consumer spending is one of the main drivers of economic growth in the US.


New York
CNN
 — 

And just like that, two of the world’s largest economies are in technical recessions.

On Thursday, Japan and the UK both reported their second consecutive negative quarters of gross domestic product, fitting the widely agreed-upon definition of a recession.

Could the US, the world’s largest economy, be next? Far from it.

Japan’s economic contraction is connected to its shrinking population, wrote Paul Donovan, chief economist at UBS Global Wealth Management, in a note Thursday. In 2022, the nation’s population declined by 800,000, marking the 14th consecutive year of contraction. That limits the country’s ability to grow because it means “fewer people make and consume fewer things,” Donovan said.

In the UK, however, population and wage growth weren’t sufficient to stave off a drop in consumer spending, one of the main drivers of that economy.

Kazuhiro Nogi/AFP/Getty Images

Japan’s economy contracted at an annualized pace of 0.4% in the last three months of 2023, causing it to lose its position as the world’s third-largest economy to Germany.

The polar opposite occurred in the US. In the past two quarters, the nation’s economy experienced much higher than expected GDP growth, due in large part to robust consumer spending.

The US economy has an edge over most advanced economies thanks to $5 trillion in pandemic stimulus money, which continues to help bolster household finances. Another advantage is being less dependent on Russian energy, making it less vulnerable than many other countries to the surge in natural gas prices that followed the full-scale invasion of Ukraine in February 2022.

But Thursday’s US retail sales data for the month of January came in much lower than expected, suggesting Americans could be fastening their belts a little more tightly after a record holiday season.

Still, the labor market remains remarkably strong, as evidenced by the nation’s unemployment rate, which has stayed below 4% for 24 straight months.

The US economy could be in a recession right now without Americans knowing it.

That’s because the economy isn’t broadly and officially considered to be in a recession until a relatively unknown group of eight economists says so.

That group, known as the Business Cycle Dating Committee at the National Bureau of Economic Research, judges the onset of a recession retroactively based upon “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

There’s no fixed rule about what that involves, but it could include factors like a spike in the unemployment rate, falling income, a major drop in spending or a negative economic growth rate.

But, importantly, two consecutive negative quarters of GDP don’t always qualify as a recession. The US experienced that in 2022, and the NBER committee didn’t announce a recession.

That said, the risk of a recession has been elevated since the US Federal Reserve began its tightening cycle in March 2022, Fed Chair Jerome Powell told reporters in December. However, he said, “there’s little basis for thinking that the economy is in a recession now.”

But even when the economy seems as though it’s never been better, there’s always the possibility of a recession in the next year, Powell added.

That’s because unforeseen economic shocks — like, say, a global pandemic — can arise at any point.

Putting that aside, Philipp Carlsson-Szlezak, Boston Consulting Group’s global chief economist, doesn’t think the US will enter a recession this year. Rather, “it’s going to be a slow-growth year,” he said.

“The resilience of the US economy is rooted in fundamental strengths,” chief among them the labor market and Americans’ personal finances, he added.

While he doesn’t think it’s likely, one potential path to a recession in the US could be if the Fed doesn’t cut interest rates at all this year.

Since investors are widely pricing in the possibility of multiple rate cuts in 2024, if they don’t pan out it could damage financial markets badly enough to ignite a recession, said Carlsson-Szlezak.



Read Nore:Japan and the UK are in recessions. Is the US next? | CNN Business