Recession Risk Continues To Ease

Recent data in the euro area has been improving as the warmer winter has reduced the potential impact of the shift away from Russian energy. The economic sentiment indicator is 4.6% q/q higher in Q1 to date and the unemployment rate remains close to its historical low. But rates continue to rise as inflation is proving stubbornly high. However given the improving economic backdrop, the risk of recession fell further in January.

• We run two probability models – one from 1985 (includes 4 recessions) and one from 1998 (3 recessions). The 1985 estimation has seen the risk of recession 6-months ahead fall from 61% to 29% in the most recent run. The shorter calculation has seen it moderate to 53% from 72%.
• Previous estimates from both models tell us that there is a non-negligible chance of a recession in Q1 and Q2 of 2023 but going into Q3 it becomes less of a likelihood. Since the probability estimates of a recession 6-months ahead haven’t approached the 90-100% mark, a slump in H1 2023 is not a given and any recession may be shallow or it may be a period of stagnation.
• While it is quite possible the euro area will avoid a recession, some of it members may not, such as Germany and Italy.