Increased Recession Risk Makes ECB Decision Tough

The European Commission revised down its growth forecasts this week by 0.2pp in 2023 to 0.8% and by 0.4pp to 1.3% in 2024. The growth outlook for the euro area is certainly lacklustre but there is increased talk again about a possible recession. One of our recession probability estimates is also signalling that there is a significant risk. The ECB meets on Thursday and it looks like the decision is going to be a difficult one with increased recession risk requiring a different response to persistently above target inflation (See MNI ECB Preview: September 2023 and MNI Decision Close Call But Risk Of Upward Revision To 2024 CPI Forecast).

• We have two estimates for the probability of a euro area recession six months ahead, one starting in 1985 and another in 1998. Both are off their Q2 2023 troughs thus signalling soft growth going forward but the latter equation is flashing red (over 50%) for a recession around the turn of the year and into Q1 2024. It rose above 50% in June and was 69% in August, down slightly from 70% in July. Real oil prices in euros, yield curve and economic sentiment have pushed it higher while real equity prices and unemployment have worked in the other direction.
• The ECB will have a new set of projections at the September meeting. In June it expected 0.9% GDP growth in 2023 followed by 1.5% in 2024 but these are likely to be revised down as not only did Q2 2023 come in below their 0.3% q/q forecast but at this point the 0.4s going forward look optimistic given the last four quarters have been below that.
• It is worth noting that econometric calculations are only estimates and not predictions.