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MarketScape · 10.02.23

The High Probability of Recession in Europe Likely Will Burden Equities

Higher interest rates, rising energy prices and plummeting credit are likely pushing the European economy into recession. Chief Investment Strategist for EMEA and APAC Wouter Sturkenboom, CFA, analyzes the global forces affecting Europe and explains how we’re positioned in our portfolios.
Economic Insights & Trends
Equity Insights
Markets & Economy
Chief Investment Strategist – EMEA and APAC
Key Points
What this is
We analyze the forces potentially pushing the European economy into recession and outline how we're positioned.
Why it matters
Higher interest rates and energy prices has put a drag on the European economy, which may impact markets.
Where it's going
The growing list of economic troubles in Europe makes the probability of recession high, meriting caution toward European equities.

Higher interest rates, rising energy prices, and plummeting credit are likely pushing the European economy into recession. We think the European Central Bank has delivered a final blow by continuing to tighten monetary policy, reinforcing our caution toward Europe and develop market equities outside the US. Let's take a closer look.


First and foremost, we believe the European Central Bank has hiked rates too much, severely damaging the availability of credit. Its full impact on the economy is likely still to be felt. But credit has already plummeted across all categories. And corporate loans are at outright decline.


A survey among banks shows corporate credit demand hitting new lows, as credit standards tighten. Further, we expect a global rise of real yields and energy prices to hurt investment and consumption. And with trade already on the back foot due to China's economic struggles, Europe's economy doesn't have much to fall back on.


The latest business and consumer sentiment data reinforced a picture of a looming recession. The for Europe's manufacturing and services sector has dropped below 50, indicating contraction. And consumer confidence has fallen. As a result, retail sales, industrial production, and trade are all declining. The only silver lining is that inflation has fallen more rapidly than expected.


We think this growing list of economic troubles makes a probability of recession across Europe high. In our view, the European Central Bank, by looking backward more than forward, will likely keep monetary policy tight for too long. And policy makers can't control rising real yields, higher energy prices, and weak trade at the same time. Therefore, we've maintained our cautious stance towards with a tactical underweight to develop markets outside the US in our global policy model that guides allocation in Northern Trust portfolios.

Main Point

Likelihood of Recession Merits Caution on European Equities

We think the European Central Bank, by looking backward more than forward, will keep interest rates too high for too long, contributing to the path toward likely recession. In our global policy model that guides allocation in Northern Trust portfolios., we've maintained our cautious stance towards European equities with a tactical underweight to develop markets outside the U.S.


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Wouter Sturkenboom

Chief Investment Strategist – EMEA and APAC

Wouter Sturkenboom, CFA, CAIA, is chief investment strategist for EMEA and APAC at Northern Trust. He is also a member of the Interest Rate Strategy Committee and Investment Policy Committee.

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