EUROZONE: Unlikely To Face A Recession In 2025 But Risk Of Trade/Energy Shocks

Q4 GDP data showed that growth remained weak in the euro area at the end of 2024 and rising natural gas prices from a cold winter and the end to Russian pipeline flows through Ukraine are likely to weigh on already disappointing growth. Despite falling German activity, our January estimate of the recession probability 6-months ahead remained close to zero. The euro area remains vulnerable to trade and energy shocks though, which aren’t modelled.

• The euro area was flat on the quarter in Q4 to be up 0.9% y/y, while Germany continues alternating between positive and negative falling 0.2% q/q in Q4 to be down 0.2% y/y.
• The region is yet to face a universal tariff from the US, but President Trump has said it won’t escape. The US had a $235.6bn visible trade deficit with the EU in 2024 and 18.6% of its imports came from the group.
• Our estimate from 1985, which includes four recessionary episodes, has had no probability of a euro area recession 6-months ahead for over a year. The one from 1998 with three recessions has dropped to around 9% in January from 31% in June, the 2024 peak, and 64% in September 2023. The ECB began easing in June last year.
• Real oil prices, M3 growth and the change in unemployment are adding upward pressure on the recession probability, while the real repo rate, real exchange rate, economic sentiment and the yield curve are providing downward pressure. Real equities have been neutral.
• It is worth noting that econometric calculations are just estimates and not a projection. 

Euro area recession probability 6-months ahead estimate