GB
gb
GB
en-GB
gb_intm_classes
intm
Intermediary
en
en

Recession Watch: Europe and USA

Recession Watch: Europe and USA
6316021108112

We’ve been talking about recession for most of this year. But unemployment has stayed very low in most countries and if you just watched the equity markets, you’d think the risk of recession had receded recently. Most markets are up 10% or so in the last month, led by Europe. So what’s going on?

First, the global economy has done better as summer has turned to autumn. The US consumer has kept on spending fuelled by their covid piggy bank. That’s the pile of cash and reduced debt built up during covid. While European consumers worried about high gas prices, their US counterparts were pleased that the gas price they care about –gasoline – was going down: from over $5 a gallon in June to below $4. Still high by their standards but reassuring in terms of direction.

As a result of this and the tight labour market, consumers have remained reasonably confident. They kept spending despite a squeeze on their incomes. The chart in the video shows a steady increase in consumer spending after adjusting for inflation. It occurred despite a significant fall in household incomes in real terms. The cumulative gap is 6.6%. Had consumer spending fallen in line with the drop in real incomes we would already have had a major recession in the US.

In Europe, confidence was hit hard by the war in Ukraine and the associated surge in energy prices. German industrial production is down by 15% since February. But recently, things have begun to look a little better. The easing of supply shortages has allowed capital expenditure (CAPEX) shipments in the big three developed economies to surge in Q3, by an annualised 18% according to estimates by J.P. Morgan.

That same easing of supply conditions has boosted auto sales in Europe and the US. Indeed, Europe’s hard-pressed consumers had some relief. Although economic data are seasonally adjusted, in the real world it’s different and the pain for households in the northern hemisphere, from high energy prices, was limited in the summer. And while inflation surged unemployment remained remarkably low. Meanwhile, valiant efforts by Germany filled their gas storage and fears of blackouts and rationing over the winter receded.

In recent weeks, forecasters have revised up the projections for growth to the end of this year for both the US and Eurozone economies. Not by much but in sharp contrast to the previous pattern of hefty downward revisions.

So has recession been cancelled? Unfortunately not. Although headline inflation is falling in the US, powerful domestic pressures remain. Wages and rents are rising rapidly. There are plenty of forces pushing inflation down …the lagged effect of the strong dollar, easing of supply constraints (notably in cars), falling commodity prices and base effects. But until and unless there is a meaningful easing in the labour market, the Federal Reserve will keep on tightening. Where that will take interest rates no one knows for sure – and that includes the Fed. But in my view, the US needs a recession to get inflation sustainably on target and my guess is that 5% might be enough …that’s where Fed funds are currently priced for next year. But the risks are to the upside.

If I’m wrong and Fed funds peak below 5% it will be because recession arrives in the first half of next year. Indeed, the signs are that the surge in CAPEX shipments is already over. After a strong Q3, best estimates see zero growth in Q4. And European consumers will start paying those hefty energy bills. Yes, governments have stepped in. Germany has put aside a remarkable € 200bn, that’s 5.2% of GDP, to subsidise consumers and businesses alike. But the bills will still be much higher …double last year’s level.

So recession is still on the horizon in both the US and Eurozone.

What about the UK? Much has been made of Jeremy Hunt’s Autumn Statement. It delays much of the fiscal contraction until after the next election (which has to be held by January 2025). That may be. But the real income squeeze remains. There will be an astonishing 7% fall in real incomes over this year and next according to the Office for Budget Responsibility.

Consumers here have their own covid piggy bank and they probably drew on it over the last few months. And the autumn has been remarkably mild, keeping the energy bills down. But winter is upon us and despite the government support scheme, energy prices have doubled since last year and are set to rise another 20% in April.

Despite the backloading of Hunt’s austerity, stealth taxes are rising and this is especially powerful in these times of high inflation. In contrast to Europe and the US, there has been no increase of growth forecasts for the UK. They have continued to head down. We have probably entered recession here already. Unemployment remains low but that can’t last.

The good news is that inflation here and elsewhere should fall quickly once recession hits. Markets are much more flexible now than they used to be. The imbalances that typically presage deep and protracted recessions are largely absent. I think the newsflow on the world economy, including the UK, will be much more positive at the end of next year than at the beginning.

And so, on that cheery note in an otherwise gloomy outlook, its goodbye until next week.

Steven Bell
Chief Economist, EMEA
Risk disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle.

You might be interested in...

5 October 2026

Market Perspectives: Déjà vu – another bond sequel

Government bond yields are rising again – but this is not simply a repeat of 2022. We consider what fiscal pressures, inflation uncertainty and higher borrowing costs could mean for bonds, equities and portfolio positioning.
28 September 2026

Market Perspectives: What’s in store for Q4?

Four factors are likely to have an important bearing on financial markets in the fourth quarter of 2026: US politics, fiscal policy in the UK and France, developments involving Iran, and the corporate earnings outlook.
21 September 2026

Market Perspectives: The roadmap for central banks

After a series of policy meetings across the major central banks, the direction of travel for interest rates remains finely balanced.

Why Columbia Threadneedle for low-cost multi-asset

Columbia Threadneedle Universal MAP redefines value through active multi-asset solutions and business support at a passive price point. Fund OCFs at 0.29%-0.39%.

Our Portfolio

The Columbia Threadneedle Universal MAP and Sustainable MAP ranges offer risk-controlled portfolio options designed to cover a host of client growth, income and sustainability needs.

Important information

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

For professional investors only.

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

The Fund is a sub fund of Columbia Threadneedle (UK) ICVC III, an open ended investment company (OEIC), registered in the UK and authorised by the Financial Conduct Authority (FCA).

English language copies of the Fund’s Prospectus, summarised investor rights, English language copies of the key investor information document (KIID) can be obtained from Columbia Threadneedle Investments, Cannon Place, 78 Cannon Street, London, EC4N 6AG, email: [email protected] or electronically at www.columbiathreadneedle.com. Please read the Prospectus before taking any investment decision.

The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. The manager has the right to terminate the arrangements made for marketing.

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); in Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Thank you. You can now visit your preference centre​ to choose which insights you would like to receive by email.

Thank you. You can now visit your preference centre​ to choose which insights you would like to receive by email.