Global threats

UK, Japan enter recession and others look weak too

Last week, both Japan and the United Kingdom (UK), two of the world’s largest economies, reported that they had had negative growth in gross domestic product (GDP) for two successive quarters. This is generally accepted by economists as a signifier of an economy being in recession. Japan may have, as a consequence, slipped down the list of the largest economies — Germany may have a larger GDP than Japan, in which case the latter is now the fourth- and not the third-largest economy in the world. Not that Germany is doing too well, either. The former engine of the euro zone is now its weakest link. For two decades, Germany’s export-oriented, manufacturing-intensive economy did well, thanks to close links to Chinese productivity and demand, as well as cheap and reliable natural gas from Russia. Geopolitics has now reduced the salience of both these growth drivers. In 2024, Germany is expected to grow only 0.2 per cent year-on-year, as against the predicted 1.3 per cent. This follows a contraction of 0.3 per cent in the previous year. Politics has had a role to play in the UK’s recession as well — the effects of the 2016 vote to leave the European Union are just beginning to play out. In addition, problematic domestic politics has meant that the country has failed to build any new housing or infrastructure, which has made its consumers feel much poorer. Lower consumer demand is what has pushed the country into recession.

The risk to economic growth in the world today is, clearly, politics. The one bright spot in the global economy — the United States — is not immune to this danger. While markets in the US are hitting record highs, companies have begun warning in this earnings season of the risks to their profits from the Red Sea attacks and domestic boycotts driven by divisions over Israel and Palestine. An unorganised boycott of the fast food chain McDonald’s over its business in Israel, for example, seems to have caused it to underperform in the last reported quarter.

Meanwhile, the world’s second-largest economy, mainland China, is finding it difficult to return to its days of world-beating growth. On Sunday, the People’s Bank of China decided not to cut interest rates, although the country was facing major deflationary issues alongside low demand and a slow-moving but intense real estate crisis. Last month, total high-end real estate transactions in China were a third lower in value than they were in the same month of 2023. Given the proportion of Chinese GDP and growth that emerges from the property market, reforming that market is essential if growth is to return to the mainland — but here, again, politics intervenes. Reforming real estate will require Beijing to create independent centres of power in bankruptcy authorities, local governments, and the private sector — and that it is not willing to do. The sole exception to this litany is Japan. In the end, that country’s shrinking economy is inevitable, given that it is also demographically challenged. Its problems are structural and not political — unless it is argued that the country’s inability to reform society sufficiently to make it more attractive to have children is also born of political dysfunction.

The global economy has faced multiple hits thanks to geopolitics. The Ukraine war shook up energy prices; US-China rivalry broke supply chains; now West Asia is once again unstable. For multiple countries, the fragile economic recovery after the pandemic is clearly being threatened by the failure to maintain global order.