Japan has unexpectedly sunk into recession in the third quarter, raising the prospect of a snap election as the country’s prime minister, Shinzo Abe, attempts to secure a mandate to breathe life into the world’s third biggest economy.

The country’s output shrank 0.4% from July to September according to figures released on Monday, which the cabinet office said showed the economy was shrinking at an annual rate of 1.6% – far worse than economists’ forecasts for annualised growth of about 2%.

Japan’s descent into recession for the third time since the financial crisis comes a day after David Cameron warned fellow G20 leaders about the fragility of the world economy. China has reported a decline in GDP that has dented growth in the region and among major exporters including Germany, Russia and Brazil. The gathering conflict in Ukraine has also spooked markets.

Abe is widely expected to postpone a planned increase in sales tax from 8% to 10% next October after the GDP figures showed that a rise in the VAT-equivalent in April this year – the first for 17 years – had severely dented consumer spending. An even bigger slump in the previous quarter was blamed on the April sales tax rise, from 5% to 8%.

An economy is deemed to be in recession if it suffers two straight quarterly contractions.

Abe now faces a difficult decision: whether to address Japan’s huge public debt, now more than twice the size of its economy, by pushing ahead with what would be a deeply unpopular tax increase, or hold off and attempt to kickstart growth.

All indications are that he will opt for a delay in the tax rise and call a snap election on Tuesday. Voters would probably go to the polls in mid-December, halfway through his current term.

“In light of the sharp fall in today’s preliminary estimate, it now looks likely that PM Abe will call off the hike and announce snap elections,” said Marcel Thieliant at Capital Economics.

Abe has remained tight-lipped about his intentions, but analysts believe he would benefit from publicly opposing the scheduled tax increase and strengthening his mandate by winning an early election.

With the main opposition still reeling from its defeat two years ago, Abe’s Liberal Democratic party is practically assured of victory, but could lose the two-thirds majority it commands with its junior coalition partner, Komeito.

Abe’s approval ratings have fallen in recent weeks following the resignations on the same day of two cabinet ministers, and a run of disappointing economic news.

A poll last week by the public broadcaster NHK showed voter support for him had dipped by eight percentage points to 40% in a month.

Abe had benefited from a fledgling recovery after Japan emerged from its last recession in late 2012, with exporters taking advantage of a weaker yen.

Ordinary Japanese, however, say they have yet to feel the benefits. Instead, households and smaller firms are tightening their belts because of rising costs in sectors such as energy, while wage increases have been largely confined to major companies.

Abe was dealt another blow on Sunday when voters on the southern Japanese island of Okinawa elected a governor who opposes plans to relocate a US marine corps air base, setting Tokyo on a diplomatic collision course with Washington.

His immediate focus will be the economy, however, particularly weak consumer spending and a fall in exports.

The economy minister, Akira Amari, conceded that April’s sales tax rise had derailed attempts to get consumers spending again after two decades of stagnation and falling prices.But he added: “There is a positive ongoing cycle in the economy. We can’t just sum it all up with the word ‘recession’.”

Monday’s disappointing data is expected to prompt Abe to announce a new stimulus package of between ¥3tn (£16.5bn) and ¥4tn this week, reports said.

Meanwhile the European Central Bank chief, Mario Draghi, said on Monday that better than expected figures for the eurozone were still “dismal” and showed more needed to be done to boost growth. He also said jobless levels – particularly for young people – were unacceptably high.

The ECB is expected to ramp up its lending to €2tn (£1.6tn) in an effort to support Europe’s ailing banking system and reduce credit costs. Officials hope cheaper credit will lead to higher spending and increases in wages and prices.

Draghi said the central bank for the 18-member eurozone was in the process of lending to corporations and hinted that the policy could be extended to include loans to governments in the currency bloc.

He said the ECB programme of debt purchases “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term”.

Germany has sought to block the ECB making loans to Italy, Spain and other countries keen to cut the cost of financing their debts in the belief that they will lose the incentive to make radical reforms to their business and labour markets.