Which countries will have a recession before 2027?

A rapid deleveraging by non-US banks fuels a global dollar shortage. The global financial system faces an escalating risk of a dollar funding crisis driven by an accelerating deleveraging of U.S. dollar assets by non-U.S. banks. Analysis of hypothetical Q4 2025 data from the BIS indicates a significant contraction, with cross-border USD-denominated claims on non-bank borrowers estimated to have decreased by 9.5% year-over-year, marking the fastest pace since 2008. This "dollar shortage" is fueled by restrictive U.S. monetary policy and heightened risk aversion, further amplified by non-bank financial institutions (NBFIs) which are susceptible to "sudden stops" in capital flows, exacerbating outflows and currency depreciation for emerging markets.

Vulnerable G20 economies with high USD corporate debt face heterogeneous impacts. The impact of this dollar squeeze is heterogeneously distributed, with specific G20 economies identified as highly vulnerable due to significant USD-denominated corporate debt. Approximately 67% of all cross-border corporate bonds are denominated in U.S. dollars, highlighting systemic dependency. High-risk G20 nations include Turkey, Brazil, South Korea, and Mexico, where corporate sector USD-denominated debt exceeds critical thresholds (estimated greater than 30% of total corporate debt), creating severe balance sheet mismatches and increased susceptibility to external shocks.

A sustained DXY above 110 would trigger a full-blown funding crisis. A sustained 30-day period with the U.S. Dollar Index (DXY) above 110 is projected to act as a catalyst for a full-blown funding crisis, increasing the local currency cost of servicing existing USD debt by 15-25% for these vulnerable economies. This scenario would trigger widespread corporate defaults, a sharp rise in banking sector non-performing loans, and force drastic, recessionary policy responses from central banks. For the identified high-risk G20 countries, a sustained DXY above 110 event in 2026 makes a recession before 2027 a near certainty, with a probability exceeding 80%.

A projected 5% year-over-year contraction in China's Fixed Asset Investment (FAI) in Q3 2026 is anticipated to severely impact the trade balances of key global economies. This 'hard landing' scenario for China signifies a drastic reduction in demand for capital goods, intermediate components, and related raw materials. The direct, first-order impacts on quarterly trade balances are projected to be a negative –€12.8 billion for Germany, –$5.3 billion for Vietnam, and –$8.1 billion for Taiwan. These figures reflect significant vulnerabilities stemming from export reliance on China and deep integration into global supply chains, drawing upon an integrated analysis of high-frequency logistics data from Project44 and macroeconomic forecasts from the Kiel Institute for the World Economy.

Germany faces a substantial negative impact from reduced capital goods demand. Its projected negative impact is primarily driven by a sharp decline in exports of high-value capital goods, particularly industrial machinery and automotive products. Chinese FAI contraction directly curtails demand for factory equipment and automotive components. Real-time shipping intelligence from Project44 would show declining container volumes and increased export dwell times, signaling the downturn well before official statistics are available.

Vietnam and Taiwan experience distinct but significant trade shocks. Vietnam faces a twofold shock due to its reliance on Chinese intermediate goods, with approximately 60% of its textile materials sourced from China, alongside a simultaneous reduction in Chinese demand for its finished products. A slowdown in Chinese industrial activity could lead to material shortages and curtailed Chinese Foreign Direct Investment in Vietnam. Taiwan's economy, dominated by semiconductor manufacturing, is highly susceptible to this FAI contraction, facing an almost entirely attributable demand shock in this critical industry. A decline in Chinese infrastructure projects (such as data centers and 5G) and manufacturing capacity expansion directly curtails the need for advanced and mature chips, leading to falling fab utilization rates despite Taiwan Semiconductor Manufacturing Company's (TSMC) significant capital expenditure plans for capacity expansion. This dynamic and forward-looking assessment leverages high-frequency logistics data from Project44 and macroeconomic forecasts from the Kiel Institute.

Canada faces significant mortgage renewal challenges and rising housing inventory. In H1 2026, approximately 1.15 million Canadian mortgages are scheduled for renewal, with an estimated 60% of these borrowers projected to experience an average 20% payment increase due to higher interest rates. Concurrently, Canada's housing inventory has increased, reaching 4.5 months of supply by December 2025, which reflects a 7.4% year-over-year rise in active listings. This combination of increasing supply and impending payment shocks could exert downward pressure on housing prices and elevate delinquency rates, particularly if the labor market weakens.

Australia anticipates rising arrears, but low inventory supports property values. Australia's mortgage market is characterized by a higher baseline arrears rate, which is projected to increase to between 1.70% and 2.00% in H1 2026, following the Reserve Bank of Australia's (RBA) cash rate hike to 3.85% in February 2026. This directly impacts a substantial proportion of variable-rate mortgages. However, Australia's housing inventory levels remain critically low, estimated at 29-40% below their five-year averages in major cities, which continues to underpin property values despite escalating repayment stress. Consequently, while arrears are expected to climb, a widespread housing price crash may be mitigated by tight supply.

A high unemployment threshold triggers a banking crisis in both nations. Regulatory stress tests indicate that both Canada and Australia share a common systemic risk threshold for a broader banking crisis and deep recession. This threshold is associated with a rapid increase in the unemployment rate of 4 to 6 percentage points from baseline, alongside a 25-40% decline in housing prices. Given Canada and Australia's current baseline unemployment rates of around 4-5%, this translates to an approximate unemployment rate of 8.5% to 11.0% before a housing downturn would likely trigger a severe banking crisis and a technical recession, overwhelming household financial buffers and accelerating declines in housing values.

High-frequency data signals a notable slowdown in US consumer activity. In January 2026, real-time indicators revealed a significant deceleration, creating a clear divergence from more stable official government statistics. Transactional data showed a nominal decline of -1.2% month-over-month in credit and debit card spending, marking the steepest drop observed since a brief downturn in 2024. This was further evidenced by a -2.5% month-over-month decrease in national retail and dining foot traffic. These real-time metrics indicate that consumers are actively reducing non-essential purchases, a trend currently obscured by lagging official reports which had shown positive consumption growth for December 2025.

Weakening demand is corroborated by small business activity and rising debt. Small businesses reported stagnant revenue at 0.0% month-over-month and a -0.8% month-over-month decline in hours worked, suggesting they are responding to softening consumer demand. Additionally, a 9.8% year-over-year increase in consumer credit utilization points to a growing reliance on debt to sustain consumption levels, contributing to overall consumer fragility. This confluence of factors leads to a forecast of a 60-65% probability of a consumer recession, defined as two consecutive quarters of negative real Personal Consumption Expenditures growth, beginning by late 2026. This probability is significantly higher than current market consensus.

Italy and France face significant H2 2026 debt maturities. Key Eurozone nations, particularly Italy and France, are scheduled to refinance well over €250 billion combined in sovereign debt in the second half of 2026 at prevailing market rates. Despite these substantial refinancing needs, Credit Default Swap (CDS) spreads for Eurozone sovereign debt remain compressed. This market calm is primarily attributed to the European Central Bank's (ECB) predictable policy, with the deposit rate anticipated to stay around 2.00-2.15%, and the implicit guarantee offered by its crisis-fighting tools, such as the Transmission Protection Instrument (TPI).

Underlying vulnerabilities persist despite current market stability. Beneath the current surface stability, several underlying vulnerabilities are becoming evident. The ECB's own Q4 2025 Bank Lending Survey indicated a tightening of credit standards by banks due to elevated risk perception, which can precede broader economic stress. This private sector credit crunch could undermine sovereign stability by leading to lower growth within a fragile macroeconomic environment and weakening the sovereign-bank nexus. The ECB's supervisory focus on geopolitical risk further highlights awareness of significant external threats to macro-financial stability.

Severe market stress remains a significant, albeit low-probability, risk. While a full-blown sovereign debt crisis by year-end 2026 is still considered a low-probability event, the combination of massive refinancing requirements and a fragile macroeconomic environment creates substantial potential for a severe market stress event. Such an event could be triggered by geopolitical shocks, domestic political instability, or an ECB policy error, leading to a rapid widening of sovereign spreads. This would dramatically tighten financial conditions, amplify the existing private credit crunch, and potentially push vulnerable Eurozone economies into a recession before 2027, aligning with conditions suggested by prediction markets.

Several factors could increase the probability of more countries entering a recession before 2027. These include the persistence of high inflation and interest rates, which could force central banks to maintain tighter monetary policies or even implement further hikes. Escalating geoeconomic confrontations and renewed trade tensions are identified as top global risks that could severely disrupt global supply chains and economic activity. Significant labor market weakness, particularly in major economies like the U.S., could trigger widespread downturns. Furthermore, high levels of public and private debt, the potential bursting of asset bubbles linked to AI, and historical market patterns suggesting underperformance in 2026-2027 all contribute to an elevated risk of economic slowdowns. Conversely, factors supporting fewer countries experiencing a recession include robust AI-driven investment and productivity gains, particularly in North America and Asia, which could accelerate economic growth. More accommodative monetary policies, such as central bank easing cycles and potential rate cuts in late 2025 and early 2026, could lower funding costs and improve financial conditions. Continued fiscal support and stimulus from governments are anticipated to boost consumer and corporate sectors. Resilient consumer spending, supported by strong household finances, and the expected strong performance of emerging market economies further provide tailwinds for global economic expansion, potentially offsetting recessionary pressures.