Europe’s Next Recession

Following the drop in US stock indices at the end of last year, there was quite a bit of press talk about a potential recession. But that has gone by the wayside now that the Dow managed one of it’s best starts of the year in history. 

Last year’s third quarter GDP in Germany came in negative, though for once the other countries of the block performed better and the eurozone as a whole managed to squeeze out a 0.2% quarterly growth. Should German GDP stay negative during the last quarter, the largest economy in the eurozone would once again slip into a technical recession – just as the ECB is embarking on a tightening program.

The Reality

We can talk about the next recession in Europe with certainty because of the basic reality of economics: recessions always happen. The questions that perplex economists and traders are when and how – the vital piece of knowledge needed take on the right investment position. So, is Europe due for a recession?

Recessions happen with a frequency of 7-8 years, and Europe managed to get out of the last one at the end of 2012. On the basis of time, the euro area is getting in the normal range for a recession.

However, recessions are typically based on a correction of an underlying economic imbalance created after a period of growth, and Europe hasn’t managed to perform all that well since last slipping into negative growth.

Economists might argue that the 2012 recession was technical, with quarterly negative GDP growth in the low decimals (the worst being Q1, with barely -0.4%); but that same argument can be said for subsequent growth. Quarterly growth has not cracked 1.0% since.

On an annual basis, the best economic performance was 2.8% achieved in Q2, 2017, and since then it has slipped down constantly, to register 1.6% annually in the most recent quarter.

The Data

Broadly speaking, euro area stock indices maxed out in January of last year and have subsequently tumbled between 10-15% over the next twelve months. 

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