EU Sees Economic Contraction if Russian Gas Supplies Are Halted
Bloc expects 2022 to be a tough year for households, which face a big drop in real incomes
The European Union’s economy would likely contract during the remainder of this year if supplies of natural gas from Russia were to be halted soon, with the deepest recessions felt by countries that rely on that source for much of their energy generation, the bloc said Monday.
European nations have been scrambling to sever their energy relationship with Russia since the start of the war in Ukraine. While some have made significant progress, Monday’s warning underlines the extent of the work that remains to be done to end the continent’s reliance on Russian supplies.
European governments want to wean the region off Russian oil and gas to deprive Moscow of funds to finance its war effort and to reduce the economic leverage the Kremlin currently has on European governments.
In the latest of four reports on the economic outlook published each year, the EU said that Russia’s invasion of Ukraine would slow economic growth this year as higher energy prices drain household spending power and eat into company profits.
But it said that as long as energy supplies from Russia continue, and energy prices don’t rise much further, the bloc’s economy should continue to grow. In its Spring forecast, the European Commission said it expects the EU economy to grow by 2.7% in 2022 and 2.3% in 2023, having previously forecast growth of 4% and 2.8% respectively.
A halt to Russian supplies of natural gas, decided either by Moscow or as a result of EU sanctions, would likely push the bloc’s economy into recession, the Commission’s economists warned. A similar outcome would be likely if energy prices were to rise sharply even without a halt to supplies, which the Commission calls the “adverse” scenario.
“The output reduction implied by the adverse and severe scenarios thus implies negative quarter-on-quarter growth on average in the last three quarters of 2022,” the Commission said.
Germany is heavily reliant on Russian natural gas to meet its energy needs, and would likely suffer a contraction in the event of a stoppage, the Commission said.
Even without a slide into recession, the Commission forecasts a tough year for European households. The bloc’s economists expect wage rises to be higher than in recent decades, but not large enough to match increasing prices. The result will be a 2.8% decline in real household disposable income this year.
“We should try to cushion this, especially for more vulnerable workers and households,” said Paolo Gentiloni, the EU’s top official for economic policy.
The Commission also expects to see a squeeze on companies’ profit, with many European businesses already facing tough choices following the recent surge in energy prices.
Gas and power now account for 14% of costs at Riganti SpA, a steelmaker in northwest Italy, compared with 5% before the increase in prices. The company has in turn had to raise its prices, provoking some pushback.
“Clients don’t always take it so well,” said Marco Riganti, one of two of the company’s managers and is the fourth generation to run the family business of about 220 employees. “Companies that buy our steel components don’t have nearly as high gas and energy costs as us, but they eventually realize that the rising costs all down the chain are the reality.”
“We must survive this tough patch, that’s what we are concentrating on,” he said.
The Commission also raised its forecasts for inflation, and now sees consumer prices in the eurozone rising at an annual average rate of 6.1% in 2022, up from 3.5% in its Winter forecast.
Those forecasts assume that there is no “normalization” of relations between the EU and Russia before the end of 2023, with the eurozone economy barely growing in the current quarter.
“Russia’s invasion of Ukraine is causing untold suffering and destruction, but is also weighing on Europe’s economic recovery,” said Mr. Gentiloni. “The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer.”
While the EU is set for an economic slowdown, and possibly a contraction, as a result of the war and its sanctions against the aggressor, the outlook for Russia is darker. Last month, Russia’s central bank said it expects the country’s economy to shrink by between 8% and 10%, this year.