Danger of a major recession in Europe if Putin cuts off gas

German economists predict a recession in Germany in the event of a cessation of Russian gas supplies and the effects could spread across the continent, according to CNBC.

In their six-month Common Economic Outlook, released Wednesday, Germany’s five largest economic institutes downgraded their GDP forecasts as the war in Ukraine slows recovery from the coronavirus pandemic.

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 by 3.1% in 2023, under provided that there will be no further economic blow due to the war in Ukraine and that gas flows to Europe from Russia will continue. The institutes had previously forecast growth of 4.8% in 2022.

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

The EU plans to ban Russian coal imports and is working on sanctions against Russian oil as it seeks to isolate 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, a $ 11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany completely froze the pipeline’s certification following Russia’s official recognition of two pro-Russian areas in eastern Ukraine, thus setting a pretext for the invasion that would follow.

In the event of a complete shutdown of Russian energy supplies, German institutes forecast total losses this year and next of about 220 billion euros, an amount that corresponds to more than 6.5% of annual GDP. This would result in growth of just 1.9% this year and a contraction of 2.2% in 2023.

“If gas supplies are cut off, the German economy will plummet,” said Stefan Kooths, vice president and director of business and development research at the Kiel Institute.

The European Central Bank is facing the challenge of curbing inflation without “trampling” on already weakening economic growth, which is likely to be further hit by supply shocks as the war in Ukraine continues.

Eurozone inflation hit 7.5% year-on-year in March, according to Eurostat, and German institutes forecast that the 2022 average will be 6.1%, the highest level in 40 years.

In the event of a power outage, they forecast an increase to a post-war high of 7.3%. Next year’s forecast of 2.8% will also remain well above the German reunification average and will rise to 5% in the event of a power outage, the report said.

“War shocks 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 impact. Rising prices for critical energy products after the Russian invasion are further fueling upward pressure on prices,” he added.

Geraldine Sundstrom, portfolio manager at PIMCO, told CNBC that the risk of recession in Europe is much higher than in the US at this stage.

“The European economy is not in the same position as the US economy and a possible industrial recession may be on the verge of collapse in Europe, depending on the turmoil of the war, which is certainly happening in Asia, and we have seen – especially in its industry. “A number of factories are closing due to a lack of spare parts,” said Sundstrom.

“Europe is also facing a very significant supply and inflation shock and the ECB seems to be more willing to normalize its policy, despite the fact that the risk of recession in Europe is much higher than in the US,” she added.