Will Europe See a Recession?

The war in Ukraine led to a rapid deterioration of the Euro Area economic outlook. Pre-conflict GDP forecasts for 2022 were approaching 4 percent, but have since been downgraded to nearly half that. Expectations of a looming recession have also increased, given elevated inflation and low consumer confidence and a further deterioration in manufacturing supply chain bottlenecks. The risk of a major gas shortage over the winter is also getting larger by the week.

Despite these headwinds, there are several pockets of strength in the Euro Area economy that may prevent the bloc from going into recession, even if it means growth will slow severely. These include better-than-expected GDP figures for the first half of the year and a strong labor market. Most importantly, European CEOs signal the intent to continue investing, according to our own CEO survey.

The two key risks to watch with regard to the European outlook are: 1) the pace of ECB tightening and the transmission of that policy throughout the different economies of the Euro Area common currency area; and 2) geopolitical tensions, in the form of an escalation of the war in Ukraine as it spills over for example into an EU/NATO member state.

For more, see Euro Area Outlook for 2022 and 2023: Why the Recession Risk Is Overrated.