US recession risk: Is the UK about to catch a cold?

There’s a reason the old cliché about America sneezing still gets wheeled out: it holds up. A new note from UBS flags that recession risks in the United States are quietly ticking higher again, and while nothing’s broken yet, the cracks are starting to show.

UBS tracks three main recession indicators: real-world data, credit conditions and the shape of the US yield curve.

And all of them are moving in the same direction. Not alarmingly so, but enough to suggest the so-called “soft landing” might not be the final word on the story.

Real-world

Let’s start with the real economy. UBS’s preferred tracker is built entirely from hard data: production, employment, capital spending, housing, income and consumption.

Not a PMI or sentiment survey in sight. This model had flagged trouble back in 2022, only to reverse course in late 2023 as the economy stabilised. But that recovery has since fizzled out.

April data, in particular, showed broad-based weakness across all the usual suspects. As a result, UBS now pegs the US recession probability from this model at 46%, up a chunky 12 percentage points in a single month.

Troublesome bond market

Next up is the yield curve, the time-honoured market signal where investors look at the gap between short- and long-dated Treasury yields.

After two years flashing red, that warning light had dimmed. But now it’s glowing again, albeit faintly. According to UBS, the yield curve is currently implying a recession probability of 18%. That’s a far cry from the extremes of last year, but still a notable uptick.

Then there’s credit. UBS’s credit-based model, which looks at financial ratios and lending conditions, didn’t fall into the same trap as the yield curve during the false alarm of 2022–24.

It held steady. But even that has now started to shift. The model has climbed to a 48 per cent probability, the highest level since the pandemic.

Don't press the panic button...yet

Put it all together and UBS’s composite gauge puts the US recession risk at 37 per cent. That’s up from 26 per cent in December and, crucially, closing in on the kind of levels that have historically preceded actual downturns.

To be clear, no one at UBS is calling a recession yet. The team stresses that the economy started this year on “okay footing”, but warns that “data deterioration could bring back discussion of recession risks”.

What’s more, a lot of these shifts happened before the full impact of Donald Trump’s tariffs is likely to be felt. If those start to bite, the probability numbers could push higher still.

Still the world engine for demand

For those watching from this side of the Atlantic, the message is pretty simple. The US consumer is still the engine of global demand.

If they do start to retrench (or if businesses start scaling back investment), there’s little chance the rest of the developed world comes out unscathed.

For now, the lights are flashing amber. But it’s worth keeping a close eye on May and June’s data. If the slowdown starts to look more entrenched, expect the market narrative to shift fast, from soft landing to something a lot bumpier.