Europe will experience a deep recession if Russia’s Putin closes the gas taps

The Nord Stream 2 offshore gas pipeline, the $11 billion project to double the flow of gas between Russia and Germany, is now idle and abandoned. Germany completely suspended certification of the pipeline after Russia officially recognized two pro-Russian regions in eastern Ukraine, serving as a pretext for the ensuing invasion.

Axel Schmidt | North stream 2 | via Reuters

German economists predict a recession in Europe’s biggest economy if Russian gas supplies were to stop, and the effects could spread across the continent.

In their half-yearly joint economic forecasts, released on Wednesday, Germany’s five largest economic institutions sharply cut their forecasts for gross domestic product as the war in Ukraine slows recovery from Covid-19.

The RWI in Essen, the DIW in Berlin, the Ifo Institute in Munich, the IfW in Kiel and the IWH in Halle now forecast German GDP growth of 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 previously forecast growth of 4.8% in 2022.

Ukrainian President Volodymyr Zelenskyy and the European Parliament have called on the European Union to impose a full embargo on Russian imports of oil, gas and coal in light of the atrocities committed against civilians by Russian forces in Ukraine.

The EU plans to ban imports of Russian coal and is working on sanctions against Russian oil as it seeks to shut the Kremlin out of the global economy, while Russian President Vladimir Putin has also repeatedly threatened to cut Europe’s gas supply.

However, such a move is expected to have disastrous economic consequences for both parties. Germany bought 58.9% of its natural gas from Russia in 2020, according to the European statistics agency.

The Nord Stream 2 pipeline, the $11 billion project to double the flow of gas between Russia and Germany, is now idle and abandoned. Germany completely suspended certification of the pipeline after Russia officially recognized two pro-Russian regions in eastern Ukraine, serving as a pretext for the ensuing invasion.

In the event of a total shutdown of Russian energy supplies, German institutes predict a cumulative loss this year and next year of around 220 billion euros (238 billion dollars), or more than 6.5% of annual economic output. This would translate to growth of just 1.9% this year and a contraction of 2.2% in 2023.

Inflation headaches

“If the gas supply were to be cut off, the German economy would experience a sharp recession. In terms of economic policy, it would then be important to support tradable production structures without stopping structural change,” said Stefan Kooths, vice -president and director of research. for business cycles and growth at the Kiel Institute.

“This change will accelerate for gas-intensive industries even without a boycott, because
the dependence on Russian supplies, which have so far been available at favorable prices, must anyway be overcome quickly.”

Kooths advised governments to avoid providing “poorly targeted transfers” to cushion rising energy prices.

“If such support packages are distributed on a broad front, it will further increase inflation and undermine the important signal effect of rising energy prices. This in turn exacerbates the problems of low-income households. and increases overall economic costs,” he said. .

The European Central Bank faces the particularly divisive challenge of containing record inflation without crushing already weakened economic growth, which risks being further hit by supply shocks as the war in Ukraine persists.

Eurozone inflation stood at 7.5% in March on an annual basis, according to Eurostat, and German institutes forecast an average for the year 2022 of 6.1%, the highest figure in 40 years.

In the event of an energy supply cut, they predict an increase to a post-war record of 7.3%. The projected rate of 2.8% for next year will also remain well above the average since reunification, and would reach 5% in the event of an energy blockade, according to the report.

“Shockwaves from the war in Ukraine are weighing on economic activity on both the supply side and the demand side,” Kooths said.

“Government stimulus packages during the pandemic have already had an inflationary effect. Rising prices for key energy commodities following 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 United States at this point.

“The European economy is not in the same strong position as the United States and a potential industrial recession could be on Europe’s doorstep, depending on the disruptions from the conflict, what is certainly happening in Asia, and we have seen – particularly in the automotive sector – a number of factories have had to close due to lack of parts and this has re-introduced furlough for some workers in Germany,” Sundstrom said.

“Europe is also facing a very large supply shock and inflation shock, and the ECB seems quite willing to normalize policy despite the fact that the risk of recession in Europe is much greater than in the United States. United”

Mary I. Bruner