GS Paper III

News Excerpt: The economies of the UK and Japan have slipped into recession with the latter losing the third-largest economy title to Germany.

What is a recession?

There is no single definition of recession, important ones are described below:

• A recession can be defined as a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in the unemployment rate. Many other indicators of economic activity are also weak during a recession. 
• The most common definition of recession used in the media is a ‘technical recession’ in which there have been two consecutive quarters of negative growth in real GDP. 
• The NBER (National Bureau of Economic Research, United States, a leading research institution) defines the recession as a period between a peak and a trough in the business cycle where there is a significant decline in economic activity spread across the economy that can last from a few months to more than a year. 

Causes of Japanese Recession:

• Japan's gross domestic product (GDP) fell an annualized 0.4% in the October-December period after a 3.3% decrease in the previous quarter, against the market forecasts of a 1.4% increase.
• Key pillars of the Japanese economy, consumption, and capital expenditure also decreased. 
• Private consumption makes up more than half of economic activity, falling 0.2%, versus market forecasts for a 0.1% gain.
• Capital expenditure fell 0.1%, compared with forecasts of a 0.3% gain.
• Both consumption and capital expenditure shrank for the third straight quarter.
• Japan’s nominal GDP stood at $4.21 trillion in 2023, falling below $4.46 trillion for Germany to rank as the world’s fourth-largest economy.
• According to a quarterly survey, big companies expect to increase capital expenditure by a hefty 13.5% in the year ending in March. 
• But analysts point to a delay in actual investment due to rising raw material costs and labour shortages.
• The most recent machinery orders data, regarded as a leading indicator of capital spending, showed a contraction in November. 

Causes of UK Recession:

• Britain’s economy has been stagnating for nearly two years.
• The UK economy contracted in the fourth quarter of 2023.
• It has shrunk for two consecutive quarters, and throughout 2023 the economy has been broadly flat.
• All the main sectors showed a decrease in the quarters, with manufacturing, construction and wholesale being the biggest drags on growth.
• The COVID-19 pandemic triggered the deepest contraction on record over two quarters in early 2020 when the economy slumped by 22%.

Main causes of Recessions:

• Recessions can stem from various factors, including sudden economic shocks like oil price spikes or the COVID-19 pandemic. 
• Excessive debt, as seen in the Great Recession of 2008, can also trigger economic downturns. 
• Asset bubbles, driven by irrational exuberance, can burst and lead to market crashes. 
• Both excessive inflation, as in the 1970s, and deflation, like in Japan in the 1990s, can harm the economy.
• Additionally, technological changes, while beneficial in the long term, can cause short-term disruptions, as seen during the Industrial Revolution. 

Conclusion:

The recent recessions in Japan and the UK highlight the vulnerability of economies to various factors, including external shocks, excessive debt, and stagnation. These events underscore the importance of prudent economic management and the need for policies that promote sustainable growth and resilience.