Europe will see a sharp recession if Russia’s Putin shuts down the Ghanaians

The Nord Stream 2 offshore pipeline, the $ 11 billion project designed to double the gas flow between Russia and Germany, is now unused and abandoned. Germany halted the certification of the pipeline completely after Russia officially recognized two pro-Russian regions in eastern Ukraine, putting a pretext for the invasion that would follow.

Axel Schmidt | Nord Stream 2 | via Reuters

German economists predict a recession in Europe’s largest economy if Russia’s gas supplies stop and the effects could spread across the continent.

In their biannual Joint Economic Forecast, published on Wednesday, Germany’s five largest economic institutions sharply reduced their forecasts for gross domestic product as the war in Ukraine slows down the 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, provided there is no further economic escalation related to the war in Ukraine and gas flows to Europe from Russia continue. The institutes had previously expected a growth of 4.8% in 2022.

Ukrainian President Volodymyr Zelenskyy and the European Parliament have called on the EU to impose a total embargo on Russian oil, gas and coal imports in the face of atrocities against civilians committed by Russian forces in Ukraine.

The EU plans to ban Russian coal imports and is working on sanctions against Russian oil, as it appears to be expelling the Kremlin from the global economy, while Russian President Vladimir Putin has also on several occasions threatened to cut off gas supplies to Europe.

However, such a move is expected to have serious economic consequences for both sides. Germany bought 58.9% of its natural gas from Russia in 2020, according to the European Statistics Office.

The Nord Stream 2 pipeline, the $ 11 billion project designed to double the gas flow between Russia and Germany, is now unused and abandoned. Germany halted the certification of the pipeline completely after Russia officially recognized two pro-Russian regions in eastern Ukraine, putting a pretext for the invasion that would follow.

In the event of a total halt to Russia’s energy supply, German institutes predicted a cumulative loss this year and next of around € 220 billion ($ 238 billion), equivalent to over 6.5% of annual economic output. This would result in a growth of only 1.9% this year and a decline of 2.2% in 2023.

Inflation headache

“If gas supplies were to be cut off, the German economy would go through a severe recession. From an economic policy point of view, it would be important to support marketable production structures without halting structural changes,” said Stefan Kooths, vice president and research director at Kiel Institute.

“This change will accelerate for gas – intensive industries even without a boycott
the dependence on Russian supplies, which have hitherto been available at favorable prices, must nevertheless be overcome quickly. “

Kooths advised governments to avoid providing “poorly targeted transfers” to mitigate higher energy prices.

“If such support schemes are distributed on a broad front, it will further drive up 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. .

The European Central Bank faces the unique conflicting challenge of curbing record high inflation without slowing the already weakened economic growth, which is likely to be further hit by supply shocks as the war in Ukraine continues.

According to Eurostat, eurozone inflation came in at 7.5% for March on an annual basis, and German institutes forecast a full-year average in 2022 of 6.1%, the highest pressure in 40 years.

In the event of a power outage, they predict a rise to a record post-war level of 7.3%. Next year’s expected rate of 2.8% will also remain well above average since reunification and will rise to 5% in the event of an energy block, the report said.

“The shockwaves from the war in Ukraine are weighing on economic activity on both the supply and demand side,” Kooths said.

“Government stimulus packages during the pandemic already had an inflationary effect. Rising prices for critical energy raw materials after the Russian invasion further fuel the upward pressure on prices.”

Geraldine Sundstrom, portfolio manager at PIMCO, told CNBC on Friday that the risk of recession in Europe is far greater than in the US at present.

“The European economy is not in the same strong position as the US, and potential industrial recession may be on the doorstep, depending on the disruption of the conflict, from what is certainly happening in Asia, and we have seen – especially in the automotive sector – a series of factories have to close down due to lack of parts and it has reintroduced leave of some workers in Germany, “said Sundstrom.

“Europe is also facing a very important supply shock and inflationary shock, and if anything, the ECB seems more willing to normalize policy despite the fact that the risk of a recession in Europe is far greater than in the United States.”

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