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The United Kingdom and Japan Entered Technical Recessions in Q4

Thomas O'Mahony

UK GDP fell by more than expected in fourth quarter 2023, according to new data released on February 15, 2024, which pushed the country into a technical recession. It joined fellow G7 economy, Japan, which had earlier undershot expectations and delivered a second consecutive quarter of negative growth. Despite contrasting fortunes in UK and Japanese equities recently, we remain neutral relative to policy on both opportunities.

GDP in the United Kingdom fell 0.3% in fourth quarter 2023, following a more modest decline of 0.1% in the third quarter. While headwinds remain, the worst now looks to be behind us. 1 For one, recent weakness has been centered in household consumption. This should abate as real incomes continue to expand. Business activity and investment have been performing solidly and expansionary PMIs point to a continuation. Finally, declining core CPI leaves room for rate cuts later this year. Meanwhile, Japan’s fourth quarter decline was a more benign 0.1% after a steeper 0.8% fall in the third quarter. Japan’s delayed rise in inflation saw the squeeze on real incomes begin later compared to peers. Again, however, the peak impact is likely already past, and growth should improve somewhat this year. The re-weakening of the yen will be a support to the external sector; however, we may see the Bank of Japan begin to exit negative interest rates in the coming months.

UK equities have lagged global peers in recent months, adding to the region’s valuation discount. However, a substantial portion of this relates to the value tilt of UK equities. While we recommend overweighting value equities, we prefer to do so with a modest overweight to developed markets (DM) value equities funded from broader DM. Though residual undervaluation exists, we await more decisive evidence that the United Kingdom can play catch-up to peers. Japanese equities have performed better on strong earnings growth, hopes for meaningful corporate reform, and flows from an expanded Nippon Individual Savings Account (NISA) allowance. Earnings have benefitted strongly from continued weakness in the yen, a factor we do not see persisting, while the NISA flow story is by nature also a one-off. With only a modest valuation cushion, we therefore do not see Japanese large-cap stocks as especially compelling. We prefer exposure to the reform theme via our overweight to DM small-cap equities.


Thomas O’Mahony, Senior Investment Director, Capital Markets Research


  1. Bloomberg consensus GDP growth for the United Kingdom and Japan in 2024 stands at 0.4% and 0.8%, respectively.


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