Recession, crisis or economic depression?

The macroeconomic reality is currently being debated among experts: while some predict that, in the coming months, the European economy could enter recession, others rule out an eventual crisis and claim that the latest data even point to a normalization after months of post-pandemic recovery. Beyond the possible scenarios, the reality is that the latest PMI data in the Eurozone have shown that the economy is slowing, but the question is “to what extent?”

Ismael García Puente, investment manager of MAPFRE Gestión Patrimonial, believes that the risk of recession is driving the market dynamics. Mentioning the US Citigroup Economic Surprise Index, which assesses whether the published data are better/worse than expected, he estimates that, a “possible recession scenario” is occurring, at least in the United States. However, he clarifies that recession is not the same as crisis: “Nobody likes to talk about recession, but we are not talking about a crisis like Covid or 2008; the published data are lower than expected, but for now there is not much probability that the financial system will break down.” Alberto Matellán, chief economist of MAPFRE Inversión, says that the possibility of a recession lasting more than a year and a half, which he calls a “depression,” is not being contemplated either.

The probabilities of one scenario or the other depend, to a large extent, on energy. With his eyes on Europe, where two thirds of inflation (currently at 8.6%) is due to higher energy prices, García Puente analyzes that to a greater extent than the energy component, it will be consumption that “will determine whether the future recession is deeper or not.” For the time being, the expert’s estimates suggest that the level of employment on both sides of the Atlantic “makes us slightly positive in terms of domestic consumption in the coming months.”

However, the pillars of the European economy cannot withstand such a strain with a euro that is now increasingly close to parity with the dollar (and is already at levels from twenty years ago). Experts know that a weak euro in the market would further deepen the economic slowdown. In fact, Matellán comments that this issue, in addition to the consequences it has on foreign trade, may put added pressure on the price level and on the roadmap of central banks, “giving them more reasons to be even more bullish.”

Beyond the more aggressive tone that the ECB may take, a more accommodative script change does not seem plausible without having barely begun to raise interest rates (something that, according to MGP’s investment manager, could have been discounted by the interbank sector). However, he believes that the key will be whether “central banks will be able to implement the usual measures to advocate recovery and have inflation above their target.” In short, banking on recovery and avoiding a recession (or even a crisis) to the detriment of inflation, which could continue its upward trend and move away from the European Central Bank's 2% target.

In parallel to central banks’ monetary policies, European countries are on the way to activating their own mechanisms to avoid further consequences in the medium and long term. Luis de Guindos’ words (he warned that a possible recession in Germany would drag down the rest of the Eurozone) place the focus, according to the economist, on growth: “Many governments are preparing for eventualities. There are many ways to combat them, and the most immediate way is through public spending, subsidizing or helping low incomes.”