In its Macroprudential Commentaries series, the European Systemic Risk Board Secretariat published research assessing downside risks to euro area growth and equity markets using model-based growth-at-risk (GaR) estimates, the European Central Bank Survey of Professional Forecasters distributions and options-implied return densities. The authors find a marked thickening of the left tail of one-year-ahead GDP growth forecasts during 2025, largely attributed to elevated economic policy uncertainty, while still favourable financial conditions have cushioned risks, pointing to markets underpricing the growth implications of uncertainty. The commentary reflects the authors’ views and is not an ESRB warning or recommendation. GaR estimates place the 10th percentile of one-year-ahead GDP growth between -1.7% and -2.6% across quarters of 2025, down from -0.6% in Q3 2024, while the survey-based 10th percentile fell more modestly to -0.4% by Q3 2025. A decomposition attributes most of the deterioration in GDP-at-risk to economic policy uncertainty, while the Country-Level Index of Financial Stress contributes positively, consistent with benign financial conditions. Equity indices were up around 15% year-to-date by end-November despite EURO STOXX 50 earnings expectations for 2025 and 2026 being revised down by around 6-8% after the 2 April US tariff announcements and continuing to weaken until a US-EU trade agreement on 27 July; options-implied downside risks to EURO STOXX 50 returns rose sharply in early April (10th percentile -23.66%) but by early November had reverted close to September 2024 levels (10th percentile -18.53%). Scenario analysis suggests that if financial stress rose to levels seen in March 2020 or 2009, GDP-at-risk would fall by about 2.7-3.3 percentage points, with a further spike in policy uncertainty potentially pushing the 10th percentile of GDP growth to around -5% to -5.5%.
European Systemic Risk Board 2025-12-09
European Systemic Risk Board publishes analysis linking elevated policy uncertainty to rising euro area growth tail risks and a macro-financial disconnect
Research by the European Systemic Risk Board Secretariat indicates increased downside risks to euro area growth in 2025, with model-based estimates showing a significant thickening of the left tail of GDP growth forecasts due to elevated economic policy uncertainty. Despite favourable financial conditions cushioning some risks, markets may be underpricing the growth implications of uncertainty. Equity indices rose by 15% year-to-date, but options-implied downside risks to EURO STOXX 50 returns increased sharply in early 2025, reflecting ongoing economic challenges.