Forty years ago, Japan was hailed as a model economy, achieving low unemployment, fast, steady growth (10% pa in the 1960s, 5% pa in the 1970s, and 4% pa in the 1980s), and an enormous balance of payments surplus. Its companies were at the cutting edge of technology, particularly in the field of cars and electrical goods. However over the last 25 years, things changed. Japan has endured decades of low growth, starting with the 1990s, in which it averaged 1.7%, and slipping into recession four times since 2008. Inflation has been low or negative and unemployment has risen. Only the balance of payments has continued to do well and this is partly because incomes in Japan have been so low that their demand for imports has been low. Indeed the average salary in Japan is lower than it was 25 years ago. It also currently has huge government debt, which amounts to more than 230% of GDP; compared with 20 years ago average retail prices are at the same level and house prices have dropped 43%. It also has the problem of a low birthrate and an aging, shrinking population, which means an increasing burden on those working to support those retired.
Even though the UK economy is doing better than most other developed countries there is concern among some economists that we are heading for the same problems as the Japanese.
There is still high consumer debt and a recent report in the UK suggested that 40% of households will be in financial difficulty if interest rates rise. In some ways it is therefore fortunate that the weakness of the recovery means that their rise might not occur until next year. These low interest rates help zombie firms survive. (Zombie companies are those not viable but able to keep going because their borrowing is so cheap). When interest rates increase a number of these will collapse, increasing unemployment.
There is little prospect of increased injections stimulating the economy. The government is committed to reducing its deficit and this therefore limits its ability to stimulate the economy by raising government spending or cutting taxes, the world recovery is still slow and therefore demand for UK exports has not increased as the Chancellor of the Exchequer hoped and business investment continues to disappoint, with a number of businesses probably waiting for the outcome of the EU referendum, before considering investment. Therefore the outlook is gloomy and our recovery is very much dependent upon what happens elsewhere in the world.