Russia’s withdrawal from Ukraine will not save Europe from recession this winter

Yet even if the conflict continues to turn in favor of Ukraine, Europe is unlikely to avoid a recession this winter, given the energy crisis triggered by the February invasion.

“I don’t think it’s likely [that] suddenly Ukraine pushes back Russian forces, war ends, Russian gas flows to Europe resume [and] prices go down,” said Neil Shearing, group chief economist at Capital Economics. “It just won’t happen.”

It’s also unclear what Putin’s next moves will be as his forces withdraw. He could cut off the remaining gas supplies to Europe that continue to pass through Ukraine, deepening the region’s energy crisis, or revert to even more worrying forms of insecurity if he thinks he has been cornered in a corner.

“We should have some humility about our ability to predict what’s going to happen,” Shearing said.

Europe has rushed to stockpile energy reserves so that households and businesses can retain access to electricity and heat as the weather turns colder. The effort has been successful so far, with storage facilities at 84% capacity, but at huge cost.
Governments have also introduced generous support programs to try to protect consumers and small businesses from the effects of soaring prices. The UK and Germany, along with other EU countries, have announced more than 500 billion euros ($509 billion) in subsidies for bills and other interventions aimed at mitigating the impact.

Even so, a contraction in economic activity in the coming months seems inevitable, economists warn. Output in the UK stagnated in the three months to July, data showed on Monday. Meanwhile, Germany’s Ifo institute has slashed its estimate for the growth of Europe’s biggest economy.

“We are headed for a winter recession,” said Timo Wollmershäuser, the institute’s head of forecasts, on Monday.

Most forecasters believe that the European economy will contract in the last three months of 2022 and the first three months of 2023. What will happen next remains uncertain.

It’s about gas

Europe’s dependence on Russian natural gas, although it has diminished this year, has left it vulnerable as the market experiences unprecedented volatility.

Russia is now supplying 78% less gas to the region compared to the same period last year, according to Kaushal Ramesh, head of gas analysis at Rystad Energy.

As a result, prices have surged as European buyers scour the world for alternative supplies. And skyrocketing energy costs have dramatically changed the economic outlook, pushing up household bills and forcing people to cut other expenses, while forcing heavy industry to close factories.

“The gas supply cuts from Russia over the summer and the drastic price increases they triggered are wreaking havoc on economic recovery from coronavirus,” Wollmershäuser said. “We don’t expect a return to normal before 2024.”

The closely watched ZEW indicator of economic sentiment in Germany fell again in September, data showed on Tuesday, a sign that expectations for the economy are looking increasingly gloomy.

“The outlook for the next six months has deteriorated further,” ZEW chairman Achim Wambach said. “The prospect of energy shortages in winter has made expectations even more negative for much of German industry.”

An economic slowdown in China is also bad news, he added. A real estate crisis and ongoing coronavirus restrictions could weigh on German exports.

Carsten Brzeski, global head of macro research at ING, said the success of Ukraine’s counteroffensive “shows that there is still a low probability of a positive scenario in this ocean of negative economic prospects”.

Still, he warned that it is “difficult to see a scenario in which energy prices decline significantly in the coming months”.

Rystad Energy’s Ramesh sees huge risks of renewed pressure on gas prices. They descended last week in hopes that the European Union might soon announce a robust intervention in the market. But the fundamental supply and demand concerns have not changed, and declining liquidity in the market means that large price swings are possible in either direction.

“We’re not headed for a price bottom,” Ramesh said. “There are a lot of benefits, if you ask me.”

What happens next

Much depends on how cold it is during the winter months. If temperatures drop and demand for energy increases, leading to higher prices, economic conditions could deteriorate sharply.

Government action should soften the blow. The UK has pledged that the typical UK household will pay no more than £2,500 ($2,932) for energy over the next two years. It will also support businesses, charities and public sector organizations with their energy costs for the next six months or more. Germany recently announced a 65 billion euro ($66 billion) package to help households and businesses meet their energy costs.

But most economists think the energy problem is so huge that even hundreds of billions of dollars in aid will not be enough to circumvent a slowdown. It is also not yet clear what proportion of the commitments made will eventually be implemented.

“Fiscal support lessens the severity of a recession but does not completely prevent it,” said Capital Economics’ Shearing.

As high energy prices fuel inflation, it is also adding pressure on the European Central Bank, which last week raised its key rate by an unprecedented amount, while indicating that further hikes loom on the horizon. Rising borrowing costs will be a further drag on the European economy.

The Bank of England is also raising rates aggressively, walking a thin line after predicting in August that the UK would enter recession by the end of this year.

Yet their options are limited as central banks struggle to contain the price spike. The ECB now expects inflation to average 8.1% this year and 5.5% in 2023. The Bank of England last predicted that UK inflation will peak at over 13 %, although this estimate may be revised downwards as government assistance rolls out. .

About Virginia Ahn

Check Also

Ukraine at D+257: Russia processes victim reports.

Heavy fighting continues in the Donbass, where Russian casualties are reportedly heavy. The Telegraph, citing …