In the realm of economic forecasting, the term spread has long been a topic of discussion regarding its predictive power for recessions in various countries. A year ago, my colleague, Laurent Ferrara, and I embarked on a journey to analyze the impact of term spreads on recessions across different nations. Today, we present the latest findings on the 10-year-3-month spreads in November 2023, correlated with the Q/Q GDP growth rates for 2024Q3.
- The 10-year-3-month term spreads in November 2023, %, alongside q/q GDP growth in 2024Q3, are depicted in Figure 1. The data source includes OECD, MEI via FRED, and TradingEconomics.com.
In our recent research publication by Chinn and Ferrara (2024), we delved into the predictive capabilities of term spreads on recessionary trends as outlined by ECRI, with a slight variation in using NBER for the United States.
Based on the pseudo-R2 analysis, a glimpse into our predictions revealed a promising outlook for Canada, Germany, and the US. However, when it came to Italy and Japan, the term spreads lacked the desired predictive power.
The current economic landscape paints an interesting picture, with speculations arising about recession hitting Germany and possibly Canada. While GDP growth rates are not the sole criterion for defining recessions by organizations like NBER or ECRI, they do provide valuable insights into the economic momentum of a country. France, for instance, witnessed a miscalculation in Q3 growth figures, hinting at a dimmer outlook for Q4.
Contrary to expectations, the United States showcased robust growth in Q3 at +0.8% q/q (3.1% q/q AR), despite concerns over an inverted yield curve. On the other hand, the UK posed a peculiar case where the term spread appeared ineffective in recession prediction, with better indicators being the debt-service ratio and financial conditions index. Presently, the UK stands as a potential contender for recessionary woes.
In conclusion, the term spread remains a noteworthy variable in recession forecasting across nations, albeit with varying degrees of accuracy. As we navigate through these economic uncertainties, it is crucial to consider a multi-faceted approach to analyzing recession indicators for a comprehensive understanding of global economic trends.
Leave feedback about this