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Is There Going to Be a Eurozone Recession in 2020?

The traditional leading indicators are saying different things

Tomasz Wieladek, T. Rowe Price International Economist
T. Rowe Price,  Insights, February 2020

Key insights

  • Two leading eurozone recession indicators—the German bund yield curve and M1 money growth—are currently giving very different signals.
  • Our analysis suggests that neither may be particularly reliable this time because central bank quantitative easing (QE) has weakened the predictive power of both.
  • Consumer and business surveys continue to be reliable predictors of recession in the age of QE—and these suggest the risk of a recession in 2020 is low.


The inversion of the German bund yield curve in the third quarter of last year raised concerns that the eurozone may be heading for a recession (like a U.S. Treasury yield curve inversion, an inverted bund yield curve is regarded as a harbinger of recession). However, eurozone M1 (currency supply in circulation) growth, which is also seen as a reliable indicator of recession, is currently signaling a return to expansion. Which of these two measures should we trust?

German bund yield curve inversions have preceded recessions in Europe since before the euro was formally adopted in 1999 (see Figure 1). There are three probable reasons for this: First, past recessions in Germany have tended to spill over into other economies in mainland Europe; second, German yield curve inversions have reflected macroeconomic shocks in common with all large economies in Europe; and third, prior to the euro, the German deutsche mark was the anchor currency of the European Monetary System of exchange rates, which meant that German yield curve inversions following monetary tightening always likely led to a slowdown/recession in other countries as well.

Following the adoption of the euro in 1999, inversion in the bund market continued to be a reliable predictor of recessions in the eurozone. This is likely because Germany has one of the highest degrees of financial development in the eurozone and its lack of sovereign risk—unlike, say, Spain and Italy—means that bund yields are more reflective of European Central Bank (ECB) policy rate expectations than term premia. However, during this period, the yield curve inversion also appears to have once sent a false signal: In the first quarter of 2001, the yield curve inverted but no eurozone‑wide recession followed. There was a recession in Germany and then France, but Italy, Spain, and other European countries remained recession‑free as they were experiencing very rapid credit growth as a direct result of the creation of the euro. It is, however, unlikely that these mitigating conditions will be repeated, and inversions in the German yield curve have once again reliably indicated future eurozone recessions.

German bund yield curve inversions have preceded recessions in Europe since before the euro was adopted.

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