Europe’s descent into an economic contraction looks to have been confirmed with Russia squeezing natural gas supplies to the bloc and heavy industry facing tough rationing in the coming months.
Ukraine's President Volodymyr Zelenskyy said the move — which will see flows to Germany fall to 20% of its capacity from an already low level of 40% — was tantamount to a “gas war” with Europe. Germany's Economy Minister Robert Habeck said the excuse that maintenance was the reason for the supply cut was a “farce.”
It puts Europe in a tricky situation as it contends with rampant inflation, the war in Ukraine and an already troubled supply chain following the Covid-19 pandemic.
Germany, the region's largest economy and traditional growth driver, has a particular reason to worry. It's largely reliant on Russian gas and is sliding toward a recession. The government is particularly worried about how it will keep the lights on over winter: Habeck said Monday evening that “we have a serious situation. It is time for everyone to understand that,” during an interview with broadcaster ARD.
He also said that Germany must reduce its gas consumption, noting “we’re working on that.” He said that in a scenario of low supplies, gas for industries will be reduced before private residences or critical infrastructure such as hospitals.
“Of course it’s a big concern, which I also share, that this can happen. Then certain production chains in Germany or Europe would simply no longer be manufactured. We have to avoid that with all the strength we have,” he said.
【Reliance on Russia】
With Russia under a raft of international sanctions in response to its war on Ukraine, gas is one weapon it can use against Europe.
“High energy costs are pushing Western Europe toward recession,” S&P Global Market Intelligence said in a report Sunday.
“Our July forecast already incorporates mild second-quarter contractions in real GDP in the UK, Italy, Spain, and the Netherlands. With inflation surprising on the upside, the central banks are stepping up the pace of monetary policy tightening. While a rebound in tourism and consumer services might give the region a slight lift in the summer quarter, another setback is likely in the fourth quarter given unreliable energy supplies,” it added.
【‘Clear-cut’ recession】
Exceptionally high natural gas and electricity prices will damage industrial competitiveness in Germany and other manufacturing centers. S&P warned the destructive Russia-Ukraine war will likely drag on through 2022, deflating consumer and business confidence across Europe.
It noted that euro zone real GDP growth is projected to slow from 5.4% in 2021 to 2.5% in 2022 and 1.2% in 2023, before improving to 2.0% in 2024.
“EU countries and the UK must do all they can to replenish gas stores before the cold kicks in – this means looking at every way possible to reduce energy use and improve supply. We're already seeing a large increase in shipments of LNG from the Middle East and North America. But countries need to accelerate the modernisation of their own infrastructure. Mass deployment of low-carbon, domestic energy alternatives like mini nuclear reactors and community renewables is not just a 'nice to have', it's an imperative if we are to come out of this crisis stronger.”
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With such a program of infrastructure modernization likely to take time, Europe is likely to feel more economic pain in the near term.
The possibility of a recession in Europe now seems “clear-cut,” Citi economists and strategists said in a note Tuesday, with Russia’s decision to cut gas flows again likely to have “the consequence of pushing Europe into a deeper recession.”
“As plans for energy rationing for winter get agreed upon, we expect that tighter financial conditions in Europe will induce a much worse reaction in the real economy, given the stance in savings, household leverage and corporate balance sheets.
The recession in Europe may drag down the recovery of the entire world economy. The stock market tends to be an early indicator of economic conditions. Therefore, the global stock market may eventually enter a recession ahead of the crisis.
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