Europe to see a sharp recession if Russia’s Putin shuts off the gas taps
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Nord Stream 2, the offshore gas pipeline that was built to increase the flow between Russia and Germany by $11 billion, has been abandoned and is currently unused. Germany stopped certification after Russia acknowledged two proRussian territories in east Ukraine. It was a pretext to the invasion.
Axel Schmidt | Nord Stream 2 | via Reuters
German economists forecast a recession in Europe’s largest economy if Russian oil supplies stop. This could have repercussions across Europe.
The biannual Joint Economic Forecast published Wednesday by Germany’s top five economic institutions dramatically reduced their Gross Domestic Product forecasts. This is because of the slowing recovery from Covid-19 due to the conflict in Ukraine.
RWI Essen, DIW Berlin, Ifo Institute Munich, IfW Kiel, and IWH Halle expect that the German GDP will grow by 2.7% and 3.1% respectively in 2022, 2023 and 2023. This assumes there has been no economic escalation due to the conflict in Ukraine, and that gas from Russia continues to flow to Europe. These institutes previously forecast growth of 4.8% for 2022.
Volodymyr Zeleskyy, President of Ukraine and European Parliament demanded that the European Union impose an absolute embargo against Russian oil, gas and coke imports due to the recent atrocities perpetrated by Russian forces on civilians in Ukraine.
It EU plans to ban Russian coal importsIt is working to put sanctions on Russian oil, as it seeks out to exile the Kremlin. Meanwhile, Russian President Vladimir Putin has threatened on multiple occasions to stop gas from Europe.
This move could have devastating economic implications for both parties. According to European statistics, Germany purchased 58.9% from Russia in 2020.
It Nord Stream 2 pipelineThe $11 billion project to boost the flow of natural gas between Russia, Germany and Russia, dubbed ‘the sandpiper,’ is no longer in use and has been abandoned. Germany stopped certification of the pipeline after Russia recognized the two pro-Russian areas in Eastern Ukraine. This provided a cover for an invasion.
German institutes forecasted a loss cumulative of around 220 billion euro ($238 trillion) in the Russian energy market. That’s equivalent to more than 6.5% annually of economic output. It would lead to a decline of 1.9% in 2017 and an increase of 2.2% by 2023.
Inflation headache
German economies would experience a severe recession if their gas supply was cut off. According to Stefan Kooths (Vice President and Research Director for Business Cycles and Growth at the Kiel Institute), economic policy would be affected by this.
The change in gas-intensive industries will even accelerate without a boycott.
Dependence on Russian supplies is not to be allowed, even though they have been readily available at favorable rates up until now.
Kooths advised government officials to not provide “poorly targeted transfer” to help cushion rising energy prices.
If such assistance programs are distributed on a broad basis, they will increase inflation and weaken the important signaling impact of higher energy prices. “This in turn will exacerbate the problems faced by low-income households as well as increase economic costs overall,” he stated.
The unique challenge facing the European Central Bank is to control record-high inflation while not reducing already low economic growth. This will be difficult given the ongoing war in Ukraine and supply shocks.
According to Eurostat, March inflation in the Eurozone was 7.5% on an annual basis. The German Institutes predicted a 6.1% full-year average for 2022, which would be the highest level in over 40 years.
The report predicts that the rate of increase will reach a postwar record 7.3% in the case of an interruption to energy supply. According to the report, next year’s rate projection of 2.8% would remain high above that of reunification. It could also rise to 5% if there is an energy cut-off.
Kooths stated that the shockwaves from Ukraine’s war are impacting economic activity, on the demand and supply sides.
Inflationary effects already existed when the government issued stimulus packages in response to the pandemic. The Russian invasion triggered an increase in the prices for critical energy commodities, further increasing the price pressure.
CNBC’s Geraldine Sundstrom was the portfolio manager for PIMCO on Friday. She said that there is a greater risk in Europe of a recession than in the U.S.
“The European economy is not in the same strong position as the U.S. one and potential industrial recession could be on the doorstep of Europe, depending on the disruption from the conflict, from what is happening certainly in Asia, and we have seen – especially in the automotive sector – a number of factories having to shut down, because of lack of parts and this has reintroduced furlough of some workers in Germany,” Sundstrom said.
“Europe also faces a major supply shock and an inflationary shock. In fact, the ECB seems more open to normalizing policy than it is in the U.S. despite the fact there is a greater risk of a crisis in Europe.
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