WOOD Flash – EME Macro/Strategy: how strong are the recession signals?

As the signs of softening in the US and Eurozone job markets become clearer, market sentiment has weakened sharply. In this flash note, we highlight the patterns in consumer confidence and the labour markets that have taken place before the last three recession episodes. Our assessment is that the likelihood of recession appears low, both because the data do not hint at anything like an abrupt halt in economic activity, and also because we believe that the mechanisms that have been shaping economic activity recently have some important differences relative to previous downturns: the role of wealth effects and inflation expectations. Financial markets’ turmoil could push central banks to deliver deeper and faster interest rate cuts in the near term than our baseline scenario, which currently sees monetary policy remaining mildly restrictive in 2025E.