Examining the Forces Behind Recessions in UK, JapanExaminingtheForcesBehindRecessionsinUK,Japan

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  >> The U.S. economy was surprisingly resilient in 2023, but other major advanced economies, such as Germany, the UK, and Japan, untreated a technical recession, defined as two consecutive quarters of contracting GDP growth. So what caused this? While Germany, the UK, and Japan each faced their own unique structural challenges, the common driver in recent weakness has been the hit to household real incomes. In Germany and the UK, consumers faced a sharp increase in the price of essentials, such as food and energy, following Russia's invasion of Ukraine and then felt the impact of a subsequent monetary policy tightening. In Japan, an increase in global oil prices created inflationary pressures not seen for decades, increasing prices and denting consumer confidence in an economy with an extremely low rate of saving. The U.S. on the other hand, does not rely on imports of energy. It is, in fact, a net energy exporter and comparatively more immune to shocks to global energy prices. So what are the prospects of this gap in 2024? Going forward, we expect the gap between the U.S. and other major advanced economies' GDP growth to narrow. The upcoming wage negotiations in Europe and Japan are an opportunity for employees to gain back some of their lost purchasing power over the past couple of years. As inflation continues to ease and with energy prices range bound, this should increase consumer confidence and encourage more spending. There are also some early signs that the European manufacturing sector may be at inflection point, supported by stronger U.S. GDP growth and increasing confidence that gas shortages may be a thing of the past. So while we still expect U.S. outperformance in 2024, we expect the gap between the U.S. and other major advanced economies to be less pronounced.

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