Weekly Forecasts 23/2025

Economic indices, update to the recession call and the worst-case scenario behind Peak Escalation hypothesis

Forecasts:

1. Economic indices for the U.S., Europe, and China.

2. We postpone the timing of the onset of global recession to Q1-Q2 2026.

3. The worst-case scenario behind the Peak Escalation hypothesis.

This week we take our monthly look at economic indices in the U.S., the euro area, and China. They show something of a mixed picture on the state of the world economy. Blight continues, but there are some rays of light, like we have been suspecting all through the spring. We also alter our global recession forecast. Previously, we assessed that the recession of the world economy would commence in the third quarter, but now we push it further until H1.

Recent developments also call for reassessing our Peak Escalation hypothesis. The picture we paint is not pretty, but neither are the developments we are seeing. We will not go into individual developments in this report, but just note that escalation is very active in Ukraine, while the Middle East and South China Sea (Taiwan) are in something of a ‘waiting pattern.’ Yet, we need to acknowledge that they may flare up suddenly.

We urge everyone to continue preparation for A) the coming economic malaise and B) the end result predicted by the Peak Escalation hypothesis, i.e., multiple global hot spots engulfing the world into a global war, while this may take some time coming. We naturally continue to hope that we can avoid this fate.

Tuomas

Economic Indicators

United States, May (April)

Richmond Fed manufacturing: -9 (-13)

Empire State manufacturing: -9.2 (-8.1)

Dallas Fed manufacturing: 0.9 (5.1)

Kansas Fed manufacturing: -3 (-4)

Manufacturing PMI:¹ 52.3 (50.2)

Services PMI: 52.3 (50.8)

Consumer Confidence:² 98.0 (85.7)

U.S. leading indicator; April (March):³ 99.4 (100.4)

Eurozone, May (April)

Manufacturing PMI: 49.4 (49.0)

Services PMI: 48.9 (50.1)

Germany ifo Business Climate:⁴ 87.5 (86.9)

China, May (April)

Caixin manufacturing PMI: 48.3 (51.2)

NBS manufacturing PMI: 49.5 (49.0)

Caixin services PMI: 51.1 (50.7)

It is interesting to note that recently, whenever the indices of the manufacturing surveys of regional Federal Reserve Banks have dropped, the Purchasing Managers Index of the manufacturing sector of the U.S. has risen. At this point, we have no idea why this is.

Like we have been “warning” since the start of the year, the manufacturing PMI of the euro area has risen from its depressed state during the spring, while they remain in the contraction territory. In mid-January we asked, Is global economic recovery on the horizon?, and replied that it is likely. This was mostly based on the leading indicators of the OECD. Our latest forecast for them indicated a noticeable, though short-lived, bounce in global economic activity. Mostly for this reason, we alter our global recession call below.

What raises our eyebrows a bit in the indicators above is the deep dive of the Caixin manufacturing PMI of China. We suspect that it’s related to the trade war. As such, the slump may lead Beijing to hasten the pace of stimulus in the coming months.

When the recession?

We left off last week with a notion that we need to update our recession forecasts. There were several reasons for it, including this.