The clouds of recession are gathering globally. The Chinese economy contracted in 2Q. The US notched a “technical recession.” The flow of natural gas to Western Europe is restricted. In the past three months, we have revised down our forecast for global growth to 2.5%Y in 2022, which is about 50bp below consensus and 40bp lower than in May. We are edging closer to the bear scenario from our May Mid-year Outlook. Is a global recession upon us?

Recession is our baseline view for the euro area. The flow of natural gas from Russia has been restricted, prices have surged, and we see weak growth through the end of the year. We expect a recession by 4Q, but the data will be noisy.

While 2Q GDP surprised to the upside because of the timing of the European post-Covid rebound, PMIs were already negative for July. A complete gas cut-off is the worst-case scenario and remains possible, but normalization of gas flows would bring only modest relief. Winter price levels are already partially baked in.