What's a Recession?
Dating the Euro Area Business Cycle

Defining a Recession: Our definitions of recession, expansion, peaks and troughs correspond to the so called “growth cycle”. We define a recession, for example, as a prolonged period of declining growth in the cyclical component of GDP (as measured by the movements of EuroCOIN). Analogously, an expansion is a prolonged period of increasing growth. Troughs and peaks are defined as the ending points of expansions and recessions respectively, i.e. as points of minimal or maximal growth.

In the graph below, the areas shaded green represent such expansions, while the points at the edges of the areas shaded green represent the turning points of the cycle. Note that EuroCOIN is expressed as a quarterly rate of change, not a level.

The Indicator: 1988 - 2007

There is, of course, an alternative approach to defining the business cycle, based on the concept of the “classical business cycle”. The "classical" approach defines recessions as periods of low (or even negative) growth, and expansions as periods of high growth. This is, for example, the definition adopted by the NBER’s Business Cycle Dating Committee. Hence expansions - as we define them - anticipate classical expansions.

According to our definition, the euro area economy can be in an expansionary phase even in periods when GDP is declining, provided that growth is increasing. Such an expansion took place, for example, at the beginning of 1993 (see the graph above). 

Expressing the indicator in terms of quarterly changes has an important advantage: it reveals all the information necessary to determine the cyclical turning points for both concepts of the cycle (classical and growth). An indicator expressed in levels would not, on the other hand, reveal the "growth cycle" turning points.

Dating the Euro Area Business Cycle: The indicator reveals three cycles in euro area activity since 1988.  These cycles average 43 months in length - 20 months of expansion and 23 months of contraction.

The Euro Area Business Cycle: Expansions and Contractions

The size of the cyclical fluctuations in the euro area seems to have decreased during the 1990s.

Identifying new turning points in the economy: This requires additional data, which is only available after the turning point is reached. As a result, these turning points can only be identified with a lag. Once sufficient data have become available, the new turning points will be announced on the website.  You can subscribe to these announcements here.