Fitch: Recession in the Eurozone from 2022 with the natural gas tap closed

Recession in the eurozone has now become the most likely possibility against the backdrop of the intensifying natural gas crisis, Fitch Ratings estimates in its new report.

In particular, as the rating agency reports, the complete cessation of Russian natural gas flows to the EU increasingly looks like the logical assumption for the elaboration of the macroeconomic forecasts of the Eurozone.

In this context, Fitch’s new assessment predicts that the region’s GDP will take a hit of 1.5% to 2% in 2023 compared to forecasts published by the house in June, with the German economy shrinking by 3 % and the Italian by 2%.

It is noted that Fitch then predicted an increase in Eurozone GDP at a rate of 2.3% in 2023.

And according to the new report, recession in the Eurozone is likely to start from the 2nd half of 2022, while Germany and Italy will see an annual decline in their GDP in 2023.

Europe remains extremely vulnerable to the possibility of interruption of natural gas flows despite recent significant efforts to diversify its sources, mainly with LNG, analysts of the house estimate.

The disruption of Russian flows would have a significant impact on Eurozone GDP due to the limited ability to immediately replace them with others.

Fitch even estimates that distribution through a bond would multiply the financial turmoil. As he explains, while an expanded EU-wide rationing is not inevitable even in the event of a complete halt to flows, it would pose a major risk for some countries, including Germany.

At the same time, the ability of fiscal policy to offset the impact on households and businesses is extremely limited due to high inflation.

Finally, according to Fitch, the economic impact from the natural gas shock will fade sharply in 2024 as production infrastructure and consumption habits adjust, combined with new facilities coming online.