Mon, 26 Sep 2022

Europe is facing a Recession
04 Jul 2022, 23:11 GMT+10

Europe faces a growing risk of recession due to rising oil and gas prices amid fears that Russia could cut off supplies altogether, economists have warned, cited by the Guardian.

According to Nomura, a Japanese investment bank with a significant presence in London, Europe's economy will be hit by a variety of factors, including falling demand in the US - its biggest export market - the ongoing fallout from Russia's invasion of Ukraine and the associated rise in oil prices. food and energy.

Nomura expects the European economy to start contracting in the second half of 2022 and the recession to last until the summer of 2023, with the overall decline reaching 1.7% of GDP.

Energy prices already rose in the second half of 2021 as leading economies eased restrictions imposed by the coronavirus pandemic, but Russia's incursion into Ukraine added further difficulties as the EU, US and UK sought to isolate Russia economically. Europe is still heavily dependent on Russia for its energy supplies, and Russian President Vladimir Putin has responded to the sanctions by slowing gas supplies. Russia has suspended gas supplies via the Nord Stream 1 gas pipeline to Germany, via the TurkStream gas pipeline to Bulgaria and stopped supplies to Poland via the Yamal gas pipeline, the publication reminds.

Europe is grappling with "conditions that are largely global in nature (rising energy prices and inflation, rising geopolitical risks and uncertainty) which lead us to believe that European economies will suffer the same fate - a recession -- like the US," wrote George Buckley, an economist at Nomura. Inflation in the Eurozone hit 8.6% year-on-year in June, the highest level since the bloc was created in 1999.

Analysts at US investment bank JP Morgan Chase said last week that Russia could also push oil prices higher if it uses production cuts to retaliate against efforts to contain prices by the G7 group of major economies. Analysts predicted a more than three-fold increase in prices to $380 per barrel if Russia cuts production by 5 million barrels per day. Late last week, a barrel of Brent crude for September delivery was $111 on futures markets.

"The [Russian] government is likely to retaliate by cutting production to hurt the West," JP Morgan analysts wrote. "The contraction of the world oil market is on the side of Russia."

Kay Neufeld and Jonas Keck, economists at the Center for Economic and Business Research, said Russia's invasion of Ukraine had created a "genuine pan-European crisis" and the probability of a recession in Europe was at least two in five.

Germany, Europe's largest economy, is particularly vulnerable because of Russia's control of the Nord Stream 1 gas pipeline. The pipeline is scheduled to be closed for 10 days starting July 11 for scheduled annual maintenance. Last week, German Economy Minister Robert Habeck said the government feared Russia would refuse to reopen the pipeline, which could lead to gas shortages in the winter.

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

"Constricted gas supplies will lead to further increases in energy prices for consumers, adding to inflationary pressures and claiming an even greater share of household disposable income, which is itself a recessionary risk."

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

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