The $ 11 billion offshore Nord Stream 2 pipeline, designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany has completely suspended certification of the pipeline after Russia officially recognized two pro-Russian regions in eastern Ukraine, setting the stage for the ensuing invasion.
Axel Schmid | Nord Stream 2 through Reuters
German economists predict a recession in Europe’s largest economy if Russian gas supplies stop and the effect could spread across the continent.
In their two-year Joint Economic Forecast released on Wednesday, Germany’s five largest economic institutions sharply reduced their forecasts for gross domestic product as the war in Ukraine delayed recovery from Covid-19.
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 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. Earlier, the institutes forecast growth of 4.8% in 2022.
Ukrainian President Vladimir Zelensky and the European Parliament have called on the European Union to impose a full embargo on imports of Russian oil, gas and coal in light of the atrocities against civilians 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 drive the Kremlin out of the world economy, while Russian President Vladimir Putin has also repeatedly threatened to cut off gas supplies to Europe.
However, such a move is expected to have severe economic consequences for both sides. Germany bought 58.9% of its natural gas from Russia in 2020, according to the European Statistics Agency.
Nord Stream 2, a $ 11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany has completely suspended certification of the pipeline after Russia officially recognized two pro-Russian regions in eastern Ukraine, setting the stage for the ensuing invasion.
In the event of a complete shutdown in Russian energy supplies, German institutes forecast a cumulative loss this year and next of about 220 billion euros ($ 238 billion), equivalent to more than 6.5% of annual economic output. This will lead to an increase of only 1.9% this year and a contraction of 2.2% in 2023.
Inflation headache
“If gas supplies are to be cut off, the German economy will experience a sharp recession. In terms of economic policy, it would be important to support market production structures without stopping structural change,” said Stefan Coates, vice president and director of research. business cycle and growth research at the Kiel Institute.
“This change will accelerate for gas-intensive industries even without a boycott, as dependence on Russian supplies, which have so far been affordable, must be overcome quickly anyway.”
Coates advised governments to avoid providing “poorly targeted transfers” to mitigate higher energy prices.
“If such support schemes are distributed on a broad scale, it will further boost inflation and undermine the important signaling effect of higher energy prices. This in turn exacerbates the problems of low-income households and increases overall economic costs,” he said. he.
The European Central Bank faces the uniquely controversial challenge of tackling record-breaking high inflation without halting already weakening economic growth, which is likely to be further affected by supply shocks as the war in Ukraine continues.
Inflation in the eurozone reached 7.5% in March on an annual basis, according to Eurostat, and German institutes forecast an average for the whole year in 2022 of 6.1%, the highest print in 40 years.
In the event of a power outage, they forecast an increase to a post-war record peak of 7.3%. The projected rate for next year of 2.8% will also remain well above the post-merger average and rise to 5% in the event of an energy blockade, the report said.
“The shockwaves of the war in Ukraine weigh on economic activity on both the supply and demand sides,” Coates said.
“Government stimulus packages during the pandemic were already having an inflationary effect. Rising prices for critical energy goods after the Russian invasion further fueled upward pressure on prices. “
Geraldine Sundström, portfolio manager at PIMCO, told CNBC on Friday that the risk of a recession in Europe is much higher than in the United States at this stage.
“The European economy is not in the same position as the US and a potential industrial recession may be on the verge of Europe, depending on the end of the conflict, on what is certainly happening in Asia, and we have seen – especially in the automotive sector – a number of factories have to be closed due to a lack of parts, and this has again introduced leave for some workers in Germany, ”said Sundström.
“Europe is also facing a very important supply shock and inflation shock, and if nothing else, the ECB seems more inclined to normalize policy, despite the fact that the risk of recession in Europe is much higher than in the United States.”
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