Europe threatens recession over concerns Russia could cut gas supplies | Economy

Europe is at growing risk of recession due to rising oil and gas prices amid concerns that Russia could cut supplies completely, economists say.

According to Nomura, a Japanese investment bank with significant operations, the European economy will be hit by a number of factors, including falling demand in the US – the largest export market – the ongoing effects of the Russian invasion of Ukraine and related increases in food supplies. – and energy prices. in London.

Nomura said he expected the European economy to contract in the second half of 2022 and the recession to continue until the summer of 2023, with an overall decline of 1.7% of GDP.

Energy prices had already skyrocketed in the second half of 2021 as leading economies lifted coronavirus pandemic lockdowns, but Russia’s invasion of Ukraine has added another level of difficulty as the EU, US and UK have tried to isolate Russia economically. Europe is still heavily dependent on Russia for its energy supply and Vladimir Putin has responded to sanctions by slowing down gas supplies.

Russia has cut off gas supplies through the Nord Stream 1 pipeline to Germany and the TurkStream pipeline to Bulgaria, and has cut off supplies to Poland through the Yamal pipeline.

Europe is grappling with “conditions of a very global nature (rising energy prices and inflation, rising geopolitical risks and uncertainty), leading us to believe that European economies will suffer the same fate – recession – as the US,” wrote George Buckley, a Nomura -economist. Eurozone inflation reached an annual rate of 8.6% in June, the highest since the bloc was founded in 1999.

Analysts at US investment bank JP Morgan Chase last week said Russia could also lead to “stratospheric” oil price hikes if it used the cuts in production to retaliate against the G7 group of major economies’ attempts to contain prices. . Analysts, including Natasha Kaneva, wrote that prices could triple to $380 (£314) a barrel if Russia cut production by 5 million barrels a day. A barrel of Brent crude for September delivery was worth $111 on futures markets late last week.

“It is likely that the [Russian] The government could retaliate by cutting production as a way to hurt the West,” JP Morgan analysts wrote. “The tightness in the global oil market is on Russia’s side.”

Kay Neufeld and Jonas Keck, economists at the Center for Economics and Business Research, said the Russian invasion of Ukraine had triggered “a veritable pan-European crisis” and said there was at least a two-in-five chance of a European recession.

Germany, Europe’s largest economy, is particularly vulnerable due to Russia’s control of the Nord Stream 1 pipeline. The pipeline will close for a 10-day period from July 11 for scheduled annual maintenance. German Economy Minister Robert Habeck told German media last week that the government feared Russia would refuse to reopen the pipeline, a move that could lead to shortages over the winter.

Sign up for Business Today’s daily email or follow Guardian Business on Twitter at @BusinessDesk

“It seems clear that in the event of European gas shortages, a severe recession will almost certainly be,” Neufeld and Keck wrote. “This is because European countries are connected not only through energy interconnectors, but also through highly integrated supply chains.

“A tight gas supply will lead to further increases in energy prices for consumers, which will increase inflationary pressures and claim an even larger share of household disposable income, which is itself a recession risk.”

European countries dependent on Russian gas are rushing to find alternative supplies. The German government hopes that two floating terminals that can accept liquefied natural gas will be in operation this winter.

While the UK does not import gas directly from Russia, European shortages could still exacerbate the cost of living by increasing the price of gas in open markets. That would force the UK to pay more, a cost likely to be reflected in consumer and business bills. Nomura forecasts a 1.5% decline in UK GDP amid an expected recession.

Leave a Comment