Is the world economy slipping into recession?

Is monetary tightening pushing the world economy into recession? That is the key question faced by investors and central bankers in the current situation. Unfortunately, the lack of timely data makes it difficult to judge the level of economic activity at any point in time. For instance, real GDP data are typically only available quarterly, with the first estimates published a month or more after the end of the quarter.

Analysts therefore often rely on survey-based indicators such as Purchasing Managers’ Indices (PMIs). However, the ability of such indicators to capture the state of economic activity can become inaccurate when large economic shocks occur that have sharp and pronounced impacts on economic activity. There is therefore a need to cross-check with other indicators.

Recently the OECD has proposed a Weekly Tracker that provides real-time estimates of GDP growth in 46 economies.¹ The tracker uses Google Trends data to estimate the year-on-year growth rate in weekly GDP with a very short delay. It aggregates together information about search behaviour related to consumption, labour markets, housing, industrial activity and uncertainty.²

To see the usefulness of the tracker, the figure below shows weekly estimates since early 2019 of real GDP growth in the eurozone over four quarters as indicated by the tracker. It also shows the growth rate computed from data on real GDP growth. In interpreting the figure, it should be kept in mind that these data are also estimates.

The figure shows that the tracker appears to lead the real GDP data by a few weeks. However, the two series are very strongly correlated. Computing the correlation between quarterly averages of the weekly data of the tracker and quarterly data on real GDP growth leads to a correlation coefficient of 0.99. (See scatter plot in the appendix.) This suggests that the weekly tracker is informative about real GDP growth. 

Figure 1. Eurozone

Source: EFG calculations on data from OECD and FRED. Data as of 10 February 2023.

Advanced economies

What does the tracker tell us about the current situation? We look at data from nine advanced economies: Australia, Canada, the eurozone, Japan, Norway, Sweden, Switzerland, the UK and the US. Since the data are a little erratic, we compute four-week moving averages, starting in January 2022 and ending in January 2023.

While there are large differences across countries, a common pattern is that real GDP growth seems to have reached a bottom towards late 2022 and has since risen. There is thus no evidence in the OECD Weekly Tracker of these countries slipping into recession. 

Figure 2. Advanced economies

Source: EFG calculations on data from OECD and FRED. Data as of 10 February 2023.

Emerging economies

Next, we consider nine emerging market economies: Argentina, Brazil, Chile, India, Indonesia, Mexico, Turkey, South Africa and South Korea. Interestingly, the emerging market Weekly Tracker shows exactly the same time path as for the advanced economies. That is, economic growth seems to have reached a bottom in late 2022 and has subsequently rebounded. 

Figure 3. Emerging economies

Source: EFG calculations on data from OECD and FRED. Data as of 10 February 2023.

Discussion

Many commentators will no doubt be surprised by the finding that the OECD’s Weekly Tracker shows no evidence so far of a decline in growth and rising recession risks despite the massive tightening of monetary policy across the world. However, the following points should also be borne in mind when reviewing the data: 

• The model is new and relies on information from a novel data source – Google Trends. Only after having used it for some time for real-time assessments of growth can its information content be assessed.
• The indicator is constructed to measure current real GDP growth, not future economic activity and recession risks. Indeed, the reason leading indicators are used for business cycle analysis is precisely that many economic time series are poor forecasters of future economic conditions, despite being informative about current economic activity. 
• Some other variables that have been informative in past downturns signal heightened recession risks. In many countries property prices have fallen in recent months and bank lending statistics point to a slowdown in borrowing. These variables are likely to be highly sensitive to the global tightening of monetary policy observed over the last year and there is strong evidence that they lead economic activity. 

While the OECD’s Weekly Tracker does not show any evidence of increased recession risks at present, that conclusion needs to be carefully interpreted. The peak impact of monetary policy on economic activity is often thought to occur with lag of about four quarters. Since the bulk of monetary policy tightening occurred in the second half of 2022, it seems too early to conclude that there is no risk of recession. What the OECD Weekly Tracker shows is that there is no evidence so far.

The market rally that began in the fourth quarter of last year and that continued into January this year was predicated in part on a less hawkish outlook for monetary policy. If the OECD data is correct, central banks may need to tighten further than markets currently anticipate. It will therefore be important to balance the outlook for central banks against the better earnings that would typically be associated with a stronger economy and the prospects for recession later in 2023. Markets are likely to remain highly sensitive to incoming data and how it effects the outlook for these three factors. 

Appendix. Real GDP growth in the eurozone, 2019Q1 - 2022Q3

Source: EFG calculations on data from OECD and FRED. Data as of 10 February 2023.

¹ Information about the approach and estimates for a number of countries are available at the website https://www.oecd.org/economy/weekly-tracker-of-gdp-growth/
² The Tracker uses a two-procedure approach to nowcast weekly GDP growth. A quarterly model of GDP growth is estimated based on Google Trends search information. Next, the fitted model is applied to weekly search information from Google Trends to construct the weekly tracker.