Recession Risk Estimates Rise But Still Well Below 100%

High energy costs and rising rates are putting considerable strain on the euro area economy. The European Commission is forecasting a shallow recession that began in Q4 2022 and continued in Q1 2023. This is consistent with our recession probability estimates, which are still well below 100%, but point to a risk that the recession continues into Q2 2023.

• The models estimate that the chance of a recession began to exceed 50% in August indicating the possibility of a recession in Q1 2023. As a recession is defined as two consecutive quarters of negative growth, the models are consistent with the EC’s forecast that Q1 could be the second quarter of contraction.
• The November 2022 update estimates a recession risk above 70% for May 2023. Thus there is a chance that the recession could be longer than expected but as it isn’t fully pricing in a recession yet, any contraction is likely to be shallow.
• We have estimated the probability of a recession 6 months ahead using Probit methodology - one from 1985, which covers 4 recessions, and one from 1998, which covers 3. The 1985 model includes the real repo, real eurostoxx, real oil price in euros, real effective exchange rate, Economic Sentiment Indicator, real M3, real 10yr yield. The 1998 one has the real eurostoxx, real oil price in euros, ESI, unemployment rate, 10yr-2yr yield curve.

Source: MNI - Market News/Refinitiv/EABCN.org