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UK & Japan under Recession

  • Category
    Economy
  • Published
    23rd Feb, 2024

Context

The United Kingdom slipped into recession, with its worst gross domestic product (GDP) performance in 2023 in years. Japan lost its spot as the world’s third-largest economy. Its economy is now the world’s fourth-largest after it contracted in the last quarter of 2023 and fell behind Germany. 

What is a Recession?

  • A recession is commonly defined as two consecutive quarters of contraction.
  • A recession is a significant decline in economic activity that lasts for months or even years.
  • Experts declare a recession when a nation’s economy experiences
    • negative gross domestic product (GDP)
    • rising levels of unemployment
    • falling retail sales
    • contracting measures of income and manufacturing for an extended period of time

What causes recessions?

These phenomena are some of the main drivers of a recession:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. 
  • Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills.
  • Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind.
  • Too much inflation: Inflation is the steady, upward trend in prices over time.
  • Too much deflation: While runaway inflation can create a recession, deflationcan be even worse.

Why UK, Japan fell into recession?

United Kingdom

Japan

The UK economy fell into recession at the end of last year as hard-pressed households cut back on spending amid the cost of living crisis

 

A weaker Japanese yen was a key factor in the drop to fourth place, since comparisons of nominal GDP are in dollar terms. But Japan’s relative weakness also reflects a decline in its population and lagging productivity and competitiveness.

How would it impact India?

  • While India’s GDP has been performing relatively better, no one is immune to economic problems, in the era of globalisation.
  • External headwinds are poised to hurt India’s economy too, as service exports are a major part of revenue generated by India’s IT industry and global price rise can make India’s imports expensive. 
  • India & the UK:Negotiations between India and the United Kingdom for the proposed free trade agreement (FTA) are at an advanced stage, but India is keen to safeguard its interests.
  • India & Japan:According to the MEA’s October 2023 report, bilateral trade totaled US$ 21.96 billion during FY 2022- 23. Exports from Japan to India during this period were US$ 16.49 billion and imports were US$ 5.46 billion.

What is India’s future prospective?

  • Shrinking gap: The gap between developed countries and emerging nations is shrinking, with India likely to overtake Japan in nominal GDP in a few years.
    • India is likely to overtake Japan to become the world’s third-largest economy with a GDP of USD 7.3 trillion by 2030, S&P Global Market Intelligence said in its issue of PMI in October 2023.
  • Beneficial diversification: India is benefiting from growing interest from multinationals, which see the country as a key alternative manufacturing base in the context of developed economies' supply chain diversification strategies.

What India can do to sidestep the recessionary trend?

  • India is currently the world's fifth-largest economy, placed behind the US, China, Japan and Germany.
  • For India, it's crucial to continue focusing on-
    • strengthening domestic demand
    • enhancing productivity
    • promoting sectors with high growth potential
    • diversifying trade partners
    • reducing dependency on a single market for exports and imports
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