Pictet: Deep recession in the winter in the Eurozone with double-digit inflation – Triple the cost of energy

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Her Eleftherias Kourtalis

Pictet Wealth Management is revising its eurozone GDP forecast due to a further worsening of the energy shock and a deeper recession to hit in the winter. It now expects growth to slow from 2.9% in 2022 to 0% in 2023, while estimating that we have yet to see the peak in inflation, which will hit double digits later in the year, raising the risk that it will remain higher for longer. period of time.

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As if the economic situation facing the eurozone wasn’t difficult enough, gas and electricity prices recently shot to new highs, Pictet notes in its analysis. With no end in sight to Russia’s war in Ukraine, there is little point in trying to predict energy costs on a daily basis, but one thing is clear: a recession in Europe is inevitable, and the only question is how long it will last and how severe will be.

If high gas prices persist, the eurozone’s energy import costs will more than triple compared to 2021, Pictet estimates. Although oil prices have fallen since May, the total energy bill would equate to oil prices at €180 per barrel, double the levels recorded in 2008 and 2011. At current energy prices, the income shock would amounted to more than 6% of euro area GDP, enough to trigger a more severe recession than Pictet had expected before the summer, and a return to pre-pandemic levels is now “postponed” to 2024, suggesting maintaining a negative output gap.

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Although economic data has been more resilient than expected so far, key indicators for the eurozone are deteriorating at an alarming rate. Pictet therefore downgraded its real GDP forecast to incorporate a deeper recession than previously forecast, removing almost 1% from activity in cumulative terms.

Part of the energy price shock will be offset by reduced demand, as well as partial energy substitution. News on gas storage levels has been encouraging, with most storage targets being met about two months early, and the decline in consumption appears to be faster than expected. However, as Pictet points out, the implementation of an energy voucher in countries such as Germany is very likely in the winter months.

The most immediate consequence of the energy shock will be felt in inflation, as Pictet points out. As a rule of thumb, a 100 euro/MWh increase in natural gas spot prices adds about 200 bp. to inflation. “We forecast euro area inflation to peak at just above 10% in the coming months, before easing relatively quickly in 2023, for a number of reasons, including the delayed impact of the reopening on travel and leisure, as well as the knock-on effects of higher prices in energy-intensive sectors,” he notes.

More government support, but no fiscal panacea

European governments responded to the energy shock by introducing various forms of support for households and businesses, exceeding 1.5% of GDP in total on average. These measures include regulations to mitigate the impact of energy price increases on end users, direct transfers to households and companies, targeted job support programs and tax cuts.

“While public spending will certainly continue to rise as the shock hits real incomes, there are several reasons to believe that a giant policy response similar to that of the pandemic is unlikely this time around — or that we will see a central European response that includes debt mutualization for that matter,” Pictet points out. At the same time, high inflation could well reduce governments’ appetite for bolder fiscal support.

Source: Capital

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