Recession Risks

The commonly used definition of a “technical” recession is consecutive quarter-over-quarter contractions in real GDP. Some countries, including the US, have more specific definitions, generally including criteria based around the duration, depth, and breadth of the output losses.

A “growth recession” implies that real GDP growth runs below its estimated potential rate, leading to a rise in the unemployment rate. This is what we currently forecast for the US.

Recession triggers

The typical causes of recessions include policy errors, widespread financial stress, demand and/or supply shocks, military conflicts, and pandemics.

In the case of policy mistakes, these normally relate to fiscal or monetary policy developments. For the former, this would take the form of ill-timed spending reductions and/or tax increases. For the latter, monetary policy has been too loose allowing inflation to rise well above target, followed by the central bank subsequently stepping hard on the brakes to bring it back down and keep inflation expectations anchored.

In the current instance, the policy risks primarily relate to trade. Although not our base case, a reintroduction of higher US reciprocal tariffs, leading to a broader range of counter-measures and widespread financial market turbulence, would materially increase the risk of a US recession and significant negative spillovers to the US’ key trading partners.

Below, we highlight several countries either in, heading for, or at significant risk of, recession.

United States

Several factors are conspiring to slow the US economy in 2025, leaving it perhaps vulnerable to shocks that could give rise to a recession. The most obvious potential source of a recession-inducing shock is trade policy. Increases in tariff rates to date are the largest in modern history. Tariffs themselves are expected to give rise to higher inflation rates that are expected to keep Federal Reserve policy tight through most of 2025.

Uncertainty about trade policy could lead to sharp declines in business investment. Combined with financial stress that would likely accompany such a shock, the US could enter a recession later this year. Our expectation is that such a recession would be mild, however.

Canada

As there has been no pause on tariffs, unlike in other countries, a two-quarter recession is forecast in the second and third quarters of 2025, driven by negative impacts on demand from tariffs. The investment outlook is also subdued as uncertainty is beginning to slow private business investment.

Consumers are already experiencing higher price impacts related to tariffs, with core inflation drifting up. The Bank of Canada will have to balance monetary policy decisions to accommodate for higher inflation against a backdrop of weak, below-potential growth. 

Mexico

Mexico recently just avoided a “technical” recession. 

Higher US tariffs are a significant threat to the Mexican economy given that 80% of its exports are directed to the US, equivalent to around 27% of Mexico’s GDP, although not all of this content is value-added.

In addition to external pressures, domestic risks are also negatively affecting business sentiment and investment in Mexico. Constitutional reforms pose a concern, as they may undermine checks and balances within the government. These reforms could lead to increased centralization of economic decision-making, potentially sidelining the private sector.

Eurozone

S&P Global Market Intelligence does not currently project a technical recession in the eurozone, but we believe it will be close. We project that eurozone real GDP will contract on a quarter-over-quarter basis during the second quarter and then post negligible growth in the third quarter of the year.

We estimate recession risks to be higher among member states with greater exposure to the US market, including Ireland, Belgium, and Germany. Countries with limited fiscal space, such as Italy and France, are also considered to be at higher recession risk in the event of a shock.

United Kingdom

The latest business and consumer sentiment surveys are pointing to renewed weakness, with real GDP forecast to contract marginally in the second quarter and stagnate in the third, perilously close to a “technical” recession.

UK businesses are likely to scale back their investments and reduce headcount amid persistent domestic demand headwinds, rising payroll taxes and global trade tensions. Households face a rebound in inflation and weak sentiment reflects deep-seated concerns about economic prospects, resulting in historically high savings rates.

Japan

There is a potential risk of falling into a “technical” recession due to concerns over US tariff increase and high inflation, which may suppress both domestic and external demand. The persistent decline in real wages, coupled with deteriorating consumer sentiment, could keep consumers cautious about increasing spending.

Given that automobile and parts exports to the US account for about 6% of Japan’s total exports and that the auto industry has significant ripple effects on the rest of the economy, the prevailing uncertainty may lead to postponed investments across the sector, adding to downside risks to growth.

South Korea

Domestic demand is expected to bottom out as political uncertainty will likely ease after June’s presidential election and help restore domestic confidence. In addition, the partial pause of tariffs between the US and China, increasing optimism about easing trade tensions, and less financial market volatility will also support sentiment and exports.

Although the economy is forecast to avoid a recession, risks remain high. The adverse impact from existing US tariffs, uncertainty about US trade policy and negotiations, a correction following the frontloading of economic activities, and the possible economic slowdowns in key trading partners, are the main downside risks.

South Africa

The probability of a “technical” recession in South Africa has increased, with early indications pointing to a possible contraction in real GDP in the first quarter of 2025. The decline in manufacturing and mining output, which began in the fourth quarter of 2024, is expected to persist into the first quarter of 2025.

Weak domestic and global demand continue to hinder manufacturing activity, while logistical challenges, particularly in port and railway facilities, are limiting mining production.

Retail sales have also experienced sluggish growth during the first two months of 2025, as high interest rates, uncertainty regarding tax changes in the postponed 2025/26 national budget, and rising unemployment have negatively impacted consumer spending.

A significant recovery in agricultural production is the only factor that could shield the economy from a contraction in the first quarter. 

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.