European Central Bank research finds rolling recessions can mask sectoral vulnerabilities and raise correlated bank credit losses

The European Central Bank published research in its Financial Stability Review assessing “rolling recessions” in the euro area, defined as sectoral downturns that propagate sequentially. It argues that this pattern can help explain why aggregate credit-risk metrics such as the corporate non-performing loan ratio have remained low despite major shocks and a marked rise in business bankruptcies, while also obscuring underlying vulnerabilities. The analysis links rolling recessions to firm-level adjustment frictions and a shift toward more persistent, sector-specific shocks such as climate change, technological advances and geopolitical disruptions. It finds that vulnerabilities can build in pockets across sectors such as agriculture, construction and interest rate-sensitive industries without immediately showing up in aggregate data, but can become systemic if sectoral downturns synchronise, including via common shocks like rapid monetary policy tightening or surging energy prices and through feedback loops in credit markets and trade links. High correlations in non-performing loans across sectors including industry, real estate, trade and manufacturing point to spillover risks, and the number of sectors with rising non-performing loan ratios has increased since 2022. The box concludes that risk surveillance frameworks and policy tools should move beyond aggregate indicators by strengthening sectoral, regional and borrower-type analysis and improving the availability and quality of granular data, while noting that cross-country differences in insolvency regimes can affect the timing between bankruptcies and non-performing loans.