Anticipation Defanged ‘Eurozone Recession’

Whilst eurozone GDP was down in Q4 2022 and Q1 2023, we don’t think it is a mystery why its stocks are up.

After Eurostat revised down the eurozone’s Q1 gross domestic product (GDP, governments’ economic output measure) last Thursday, it appears the monetary union’s long-awaited recession (broad economic contraction) may have finally arrived—at least using one common definition.[i] But we don’t think this is investors’ cue to run for the hills. For stocks, it seems mostly like very old news, in our view.

After eurozone Q4 2022 GDP declined -0.1% q/q, recent downward Q1 2023 GDP revisions in Ireland, the Netherlands, Germany and Greece flipped the currency bloc’s Q1 growth from a 0.1% q/q initial growth estimate to a -0.1% contraction.[ii] Whilst many commentators we follow consider two back-to-back quarterly declines a recession, that doesn’t make it formal. The responsibility for declaring recession belongs to the eurozone’s official arbiter—the Centre for Economic Policy Research’s Euro Area Business Cycle Network (EABCN)—which hasn’t weighed in yet.[iii]

Like the US’s National Bureau of Economic Research (NBER) Business Cycle Dating Committee, EABCN’s committee considers broad criteria.[iv] Indeed, Q4 2022 and Q1 2023 GDPs’ -0.1% q/q downticks—the shallowest possible two-quarter drop—may not qualify, at least judging by EABCN’s latest pronouncement.[v] In March, they found: “real GDP growth in the fourth quarter of 2022 halted, but did not turn significantly negative, as a large drop in private consumption and investment was offset by a similarly large reduction in imports. The output growth pause contrasts with a continued robust expansion in employment, especially in the service sector.”[vi] Whether a second quarter of “output growth pause” constitutes recession or not is unclear—we will just have to wait for those fine folks to decide. Notably, US GDP endured a bigger contraction in Q1 and Q2 last year, and the NBER didn’t deem it one.[vii]

Then too, there was a lot of country-specific dispersion amongst eurozone member states’ growth rates, which we think makes it inaccurate to say the whole bloc is in recession.[viii] One way to see this: In every EABCN-deemed European Monetary Union (EMU) recession since 1995, Germany and France—the two largest eurozone economies—both contracted.[ix] This time around, whilst German GDP fell in Q4 2022 and Q1 2023, France’s rose.[x] So did Belgium’s and Spain’s.[xi] All told, 16 of 20 eurozone countries grew in the last two quarters.[xii]

Meanwhile, German recession isn’t new news, based on our observations. Three weeks ago, Germany’s federal statistics office previewed Eurostat’s mild contraction reading.[xiii] This comes after recession warnings we have heard since late 2021, making Germany’s dip one of the most anticipated economic potholes ever, in our view.

At this point, any EABCN recession declaration would come well after the fact—and following widespread anticipation last year. With Q2 wrapping up, it would be backward-looking and late-lagging, which we think is of little consequence for forward-looking markets. The MSCI EMU Index of developed-market eurozone stocks illustrates this beautifully, in our view. (Exhibit 1) It is up 30.9% in euros since its 29 September low—before recession supposedly started—outpacing the rest of the world.[xiv] And for the weaker nations specifically—e.g., Ireland, the Netherlands, Germany and Greece—their stock markets are all up more than that.[xv] (Note: Greece is in MSCI’s Emerging Markets, which the EMU Index excludes.)[xvi]

Exhibit 1: Eurozone Stocks Moved Ahead of GDP

Source: FactSet and Eurostat, as of 14/6/2023. MSCI EMU returns with net dividends, 13/6/2018 – 13/6/2023, and eurozone GDP, Q2 2018 – Q1 2023. Presented in euros. Currency fluctuations between the euro and pound may result in higher or lower investment returns.

It seems likely to us markets priced eurozone recession—if it is that—in advance and are now looking further ahead. In our view, this is a textbook example showing how stocks, once again, are the best leading indicator.


[i] Source: Eurostat, as of 8/6/2023. Eurozone GDP, Q1 2023.

[ii] Source: Eurostat, as of 8/6/2023. Ireland, the Netherlands, Germany, Greece and eurozone GDP, Q4 2022 – Q1 2023.

[iii] Source: EABCN, as of 14/6/2023. Statement based on “Chronology of Euro Area Business Cycles.”

[iv] Source: NBER and EABCN, as of 14/6/2023. Statement based on NBER’s “Business Cycle Dating” and EABCN’s “Methodology.”

[v] “The Latest Findings of the CEPR-EABCN Euro Area Business Cycle Dating Committee (EABCDC) - March 2023,” Refet Gurkaynak, John Fernald, Evi Pappa and Antonella Trigari, Centre for Economic Policy Research (CEPR), 29/3/2023.

[vi] Ibid.

[vii] Source: NBER, as of 14/6/2023. Statement based on “US Business Cycle Expansions and Contractions.”

[viii] Source: Eurostat, as of 8/6/2023. Statement based on eurozone countries’ GDP, Q1 2023.

[ix] Source: Eurostat and EABCN, as of 14/6/2023. Statement based on Germany and France GDP and “Chronology of Euro Area Business Cycles,” Q1 1995 – Q1 2023.

[x] Source: Eurostat, as of 8/6/2023. Germany and France GDP, Q4 2022 – Q1 2023.

[xi] Source: Eurostat, as of 8/6/2023. Spain and Belgium GDP, Q4 2022 – Q1 2023.

[xii] Source: Eurostat, as of 8/6/2023. Statement based on eurozone countries’ GDP, Q4 2022 – Q1 2023.

[xiii] “Gross Domestic Product: Detailed Economic Performance Results for the 1st Quarter of 2023,” Staff, Destatis, 25/5/2023.

[xiv] Source: FactSet, as of 14/6/2023. Statement based on MSCI EMU and World returns with net dividends, 29/9/2022 – 13/6/2023.

[xv] Source: FactSet, as of 14/6/2023. Statement based on MSCI Ireland, Netherlands, Germany, Greece and World returns with net dividends, 29/9/2022 – 13/6/2023.

[xvi] Source: FactSet, as of 14/6/2023. Statement based on MSCI Emerging Markets and EMU Index composition.

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