Four recession scenarios stalk the Eurozone’s fragile growth path

We still think the Eurozone economy will go through a soft patch this year, with the pace of quarterly growth halving from last year. But the growth path is fragile, and any additional shock could tip the economy into recession. To quantify the risks, we have modelled four downside scenarios.

• Scenario 1: Corporate confidence takes a bigger hit, as uncertainty over tariffs weighs on investment and hiring plans. This is the downside scenario we worry most about.
• Scenario 2: Consumers tighten purse strings. Consumer uncertainty has risen sharply and could undermine willingness to spend, especially on discretionary items such as durables. This could push up the savings rate, triggering a technical recession this year.
• Scenario 3: The trade war escalates further. In our baseline, US tariffs remain at the current 10% level, but EU-US trade talks could easily fail, risking an end to the current tariff reprieve. The US-China deal cuts the odds of this scenario, but it would be the costliest.
• Scenario 4: Banks turn off the credit tap. Although bank lending surveys were showing signs of caution before the escalation in trade tensions, we think a scenario in which banks tighten lending standards has a low probability and milder impact. Bank lending has picked up significantly in the past few months, propping up the investment outlook as lower interest rates feed through.

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