Is the Eurozone Economy Close to Recession?

Executive Summary

The recent slowdown in Eurozone economic growth has sparked fears that the bloc may be approaching, or already in, a recession. Forecasting recessions is a notoriously difficult task, and even defining what marks a recession is not always straightforward. In this report, we identify a couple simple rules of thumb that may allow readers to monitor the economic data for signs of an imminent recession in the Eurozone. While some recent indicator readings are worrying, we do not believe the data at present suggest a Eurozone recession is either imminent or inevitable.

Draghi Acknowledges Economic Disappointments

European Central Bank (ECB) President Mario Draghi spoke to the European Parliament last week and, as part of that speech, provided his latest assessment of the Eurozone economy. Among his comments, Draghi said consumption and investment are still expanding and that the labor market remains strong. He added that economic expansion is happening at slower and slower growth rates and that significant monetary stimulus is still needed, but nonetheless stated that the European economy is not heading to a recession. Clearly the prolonged period of slow growth is attracting the attention of ECB policymakers. A natural question to ask is “how close is the Eurozone to recession?” – the answer to which could have significant implications for Eurozone financial markets and ECB monetary policy.

How Can We Tell If a Recession Is Taking Place?

Of course, to know if we are in an economic recession or heading in that direction, it is important to understand what a recession looks like and how to determine if it is taking place. For the United States, an official recession, as defined by National Bureau of Economic Research (NBER), is:

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

In terms of identifying a recession, there are essentially two differing approaches. The first is to simply monitor the contemporaneous or recently released economic figures, and assess whether the data are suggestive of an economy that is in contraction. For example, a “shorthand” definition of a recession is often considered to be two consecutive quarters of a decline in real GDP.

A second and less timely approach to identifying and determining recession is to rely on an “official” arbiter of the economic or business cycle. In the United States, for example, this role is fulfilled by the NBER. Meanwhile, acknowledging that there is a shorter history of business cycle dating in Europe, the Center for Economic Policy Research (CEPR) fulfills a broadly similar task for the Eurozone economy. Determining recessions via an “official” arbiter is a less timely approach, simply because these institutions assess a broader range of economic indicators and await potential revisions to economic data before determining that the economy has started contracting. Because of this, it can be several months or quarters later before there is an official declaration that a recession has either started or ended.

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