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Risk of Eurozone Recession Rises as Gas Rationing Looms
Thu 30 Jun, 2022 -Fitch Ratings-London-30 June 2022: The likelihood of gas rationing in Europe has increased significantly following the recent disruption of Russian natural gas supplies through the Nord Stream 1 pipeline. A technical recession in the eurozone is now an increasing possibility, Fitch Ratings says.
In our June Global Economic Outlook our growth forecasts for the eurozone - at 2.6% in 2022 and 2.1% in 2023 - were underpinned by a baseline scenario that assumed neither a sudden stop of Russian natural gas exports to the eurozone nor any gas rationing.
The recent drop in Russian gas flows to Europe has renewed concerns that Russia is prepared to use gas exports as a political tool, with Germany recently activating phase two of its national gas emergency plan.
Continued disruption of gas imports through the Nord Stream 1 pipeline, unless offset with higher flows via other pipelines, would hinder the continent’s ability to meet gas needs during the peak winter heating season, despite efforts to build reserves and reduce reliance on Russian gas. This means gas rationing to industrial users is now an increasingly likely scenario, which we estimate could cut eurozone GDP growth by between 1pp and 2pp in 2023.
Rationing would dent output for industries utilising gas as a key input, with a knock-on impact on firms throughout the supply chain. Russian imports have accounted for around 30% of eurozone and 60% of German gas consumption in recent years. Fitch recently analysed the potential impact of gas rationing through supply-chain linkages using an input-output framework. This showed a 2% and 4% shock to the eurozone and German economies, respectively, in the event of a complete and sudden loss of Russian gas supplies. This represents an upper bound on the impact through supply chains, since it assumes no replacement of Russian gas with other energy sources.
The precise hit to eurozone GDP would depend on the levels of rationing required. Germany’s Federal Network Agency (BNetzA) recently suggested a shortfall of 10% of total German gas consumption in a downside scenario. But these estimates are highly uncertain. Efforts to boost alternate energy supplies - including higher LNG imports, re-opening mothballed coal plants and boosting renewables - could face infrastructural challenges and the impact of energy-efficiency measures and the weather on energy demand is hard to predict.
The EU’s plans to raise gas in storage to 80% of capacity by 1 November now also look challenging. In any case, meeting the target would only raise EU reserves to 20% of annual gas consumption, from around 15% currently.
Moreover, the GDP impacts estimated from the supply-chain framework omit several factors including the shock to real household incomes and spending from higher energy prices, the impact of increased uncertainty on capital expenditure and cross-border spillovers from lower growth in Germany and Italy. Targeted fiscal support could partly offset the shock to real incomes but the ECB is unlikely to change course on monetary tightening. Research from the IMF and Bundesbank, which draws upon a broader methodology, suggests that GDP could be cut by 3% in the EU and 3.5% in Germany in 2023.
Our June GEO forecasts eurozone average growth at just 0.1% qoq in 2Q22-4Q22. While growth this quarter and next are likely to be cushioned by the rebound in services and tourism activity, gas rationing and higher prices could easily drive two consecutive quarters of economic contraction in 4Q22 and 1Q23, when energy demand is particularly elevated. A slight shrinkage in GDP in both quarters would result in our 2023 eurozone growth forecast being cut to around 1% from 2.1%.
