If we end talking about the global recession of 2023, what and who will we blame?

If forecasts are underestimated (IMF releases new forecasts on Tuesday), here is my answer in two pictures:

Figure 1: 10-2-year Treasury spread (blue, left scale) and 5-year Treasury-TIPS spread (red, right scale), both in %. Source: Treasury via FRED and author’s calculations.

Inflationary expectations are rising over a 5-year horizon as the perceived likelihood of an extended Russian invasion of Ukraine in early November rises. The 10-2 year spread also shortens. Inflation expectations are rising again with a discrete increase in aggression starting on February 24 (as oil prices rise).

Using the term spread, we can estimate the likelihood of a recession based on historical correlations. They are shown in Figure 2.

Figure 2: Treasury spread for 10-2 years, % (blue, left scale) and probit recession probability based on the 12-month spread (pink, right scale). July data and probability based on July 21 data. Dashed line for 2021M11 and 2022M02. Peak-to-trough dates as determined by the NBER are in grey. Source: Treasury via FRED, NBER and author’s calculations.

If we use the 30% recession threshold (this covers virtually all past recessions, but also predicts the 1999-2000 recession), then we are approaching a recession starting in June 2023.

The answer will differ depending on whether 10 years-3 months should be used instead of 10 years-2 years. Also, if you were wondering if someone’s policy helped/encouraged Mr. Putin to participate in this extended invasion of Ukraine, well, you can put the blame on someone else.