Which country is the most exposed to recession? Is it the United States or the eurozone? The first answer that comes to mind is: the eurozone. It has, indeed, “technically”, already slipped into a recession in view of the double fall in GDP in Q4 2022 and in Q1 2023. But, for now, this recession looks to be only “technical”: indeed, the contraction in GDP is small and not widespread across all growth components or among eurozone members.
Besides, a technical rebound is likely in the second quarter, given the marked decline in public consumption and the very negative contribution of inventories that weighed on Q1 growth, temporarily we think. This rebound should be short-lived however and thus only postpone, for a quarter, the question of whether the eurozone really slips into recession from the third quarter. The same question arises for the US: Will the second quarter be the last quarter of growth before the recession?
Our current forecasts answer in the affirmative for the US but in the negative for the euro area, which would escape the recession, albeit barely. Not much would be needed, indeed, to shift from the expected stagnation to a recession in the eurozone, while the risk seems to be the opposite for the US at the moment, as the awaited recession is slow to materialize.
The main element underlying our US recession scenario is the largest extent of monetary tightening. The tightening of credit conditions is also more important than in the eurozone. In addition, real interest rates are set to return to positive levels, reinforcing the restrictive nature of US monetary policy. We also consider the clear recessive signal, sent for several months by the Conference Board’s composite leading economic indicator through, in particular, the sharp inversion of the yield curve.
To conclude on a positive note, there are still factors supporting growth on both sides of the Atlantic: the easing of supply constraints, the gradual decline in inflation, wage increases, the labor market resilience, the tourist season, and investment efforts in digital technology, energy transition, and industrial sovereignty. How much can this prevent recession? Verdict in a few months.
