Axel Schmidt | Nord Stream 2 | via Reuters German economists predict a recession in Europe’s largest economy if Russian gas supplies are cut off and the effects could spread across the continent. In their six-month Common Economic Outlook, released Wednesday, Germany’s five largest financial institutions cut their gross domestic product forecasts sharply as the war in Ukraine slowed the recovery from Covid-19. RWI in Essen, DIW in Berlin, Ifo Institute in Munich, IfW in Kiel and IWH in Halle now expect German GDP to grow by 2.7% in 2022 and 3.1% in 2023, assuming there is no further economic escalation related to the war in Ukraine and gas flows to Europe from Russia continue. The institutes had previously forecast 4.8% growth in 2022. Ukrainian President Volodymyr Zelenskyy and the European Parliament have called on the European Union to impose a full embargo on imports of Russian oil, gas and coal in light of the atrocities committed by Russian forces in Ukraine. The EU is planning to ban Russian coal imports and is working on sanctions against Russian oil as it seeks to oust the Kremlin from the world economy, and Russian President Vladimir Putin has also repeatedly threatened to cut off gas supplies to Europe. However, such a move is expected to have dire economic consequences for both sides. Germany bought 58.9% of its gas from Russia in 2020, according to the European Statistics Office. The Nord Stream 2 pipeline, the $ 11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany has completely suspended certification of the pipeline after Russia formally recognized two pro-Russian territories in eastern Ukraine, setting the stage for the invasion that would follow. In the event of a complete shutdown of Russian energy supplies, German institutes forecast a cumulative loss of about 220 billion euros ($ 238 billion) this year and next, equivalent to more than 6.5 percent of annual economic output. This would result in growth of just 1.9% this year and a contraction of 2.2% in 2023.
Inflation headache
“If the gas supply is cut off, the German economy will be in a sharp recession. In terms of economic policy, it would be important then to support marketable production structures without stopping structural change,” said Stefan Kooths, vice president and director of research. for business cycles and development at the Kiel Institute. “This change will accelerate for the gas-intensive industries even without a boycott, as dependence on Russian supplies, which have been available at favorable prices so far, must be quickly overcome anyway.” Kooths advised governments to avoid providing “poorly targeted transport” in order to mitigate higher energy prices. “If such support programs are distributed on a wider front, it will further increase inflation and undermine the significant signaling effect of higher energy prices. This in turn exacerbates the problems of low-income households and increases overall financial costs,” he said. . The European Central Bank faces the uniquely challenging challenge of curbing record inflation without halting already weakening economic growth, which is likely to be further hit by supply shocks as the war in Ukraine continues. Eurozone inflation rose to 7.5% year-on-year in March, according to Eurostat, and German institutes forecast a full-year average of 2022 at 6.1%, the highest figure in 40 years. In case of interruption of energy supply, they predict an increase in the post-war high record of 7.3%. The projected 2.8% next year will also remain well above the average since reunification and will rise to 5% in the event of an energy block, the report said. “The shock waves from the war in Ukraine are hurting economic activity both in terms of supply and demand,” Kooths said. “Government stimulus packages during the pandemic have already had an inflationary effect. Rising prices for critical energy commodities after the Russian invasion are further fueling upward pressure on prices.” Geraldine Sundstrom, portfolio manager at PIMCO, told CNBC on Friday that the risk of recession in Europe is much higher than in the US at this stage. “Europe’s economy is not in the same position as the US economy and a potential industrial downturn could be on the verge of Europe, depending on the cessation of the conflict, as is certainly the case in Asia, and we have seen – especially in “Automotive sector – some factories have to close due to lack of spare parts and this has restored the leave of some workers in Germany,” said Sundstrom. “Europe is also facing a very significant supply shock and inflation shock, and if nothing else, the ECB seems more willing to normalize policy despite the fact that the risk of recession in Europe is much higher than in the US.” .
