Model Signalling Shallow Downturn Rather Than Recession

Euro area Q1 GDP was revised down to -0.1% q/q after -0.1% in Q4. According to the simple rule of thumb that a recession is two consecutive quarters of negative growth, then the euro area went into recession in Q4 2022. However, like the US, they have a business cycle dating committee (see EABCN) but it will be some time before they make the call. Given that unemployment has continued to fall into Q2, it is unlikely that the euro area is in recession.

• Our 6-month ahead recession probability estimate (from 1985) rose above 50% for the first time in July 2022, signalling the risk of recession in January 2023. It peaked in September at 59% and has been below 50% since, thus signalling more of a shallow downturn rather than a recession, consistent with the 0.1% q/q declines seen thus far. GDP can see significant revisions.
• The recession estimates updated for May data were fairly stable and remained below 50% with the 1985 calculation at 16% 6-months ahead and the 1998 at 31%. Real equities, oil prices, REER, unemployment and real 10 year yield all helped to keep the risk down. The latest estimates point to positive growth in H2 2023 even if it is weak.
• It is worth noting that econometric estimates are not predictions or in this case projections.

Source: MNI - Market News/Refinitiv