Doha: Despite huge investments in renewable energy, Europe’s dependence on Russian gas has increased over the past decades. In fact, the share of European gas coming from Russia has risen from 26% in 2001 to 37% in 2019. Now, with the war in Ukraine, Russia is using this dependency to undermine European support for Ukraine and push for sanctions relief. .
Russia’s reliance on gas means prices have risen to record highs across the continent. In fact, European Title Transfer Facility (TTF) benchmark gas prices have increased on average almost eight-fold since 2010. Depends on Russian gas.
Gas plays an important role in the European economy as a marginal fuel for home heating, heavy industry and electricity production. These record highs are therefore already a headwind for the European economy. But with no end in sight to the war in Ukraine, financial markets have priced in gas prices to remain high for 2023 and 2024 for him. Impact on consumer demand, industrial production, monetary and fiscal policy.
First, consumer demand has already been hit by high energy prices, capacity constraints and a tight labor market. Consumer confidence has deteriorated sharply and has fallen further since May as utility bills in many countries are expected to double his. Similarly, prices for vacations, restaurants and other services have risen sharply as airports and hotel capacity constraints have prevented them from hiring enough staff, despite significant wage increases. Moreover, commodity prices continue to rise as bottlenecks in global supply he chains are only slowly cleared. Overall, high prices for energy, services and commodities are a major headwind for consumer demand across Europe, even as some wealthy households maintain high levels of savings.
Second, record high gas prices have already caused large corporate gas users to cut their consumption by over 10%. Moreover, in response to Russia’s cut in gas flows, the European Union has negotiated a target of reducing overall gas use by 15% by 2022. Goldman Sachs estimates that GDP would fall by 3.5% in the Eurozone, Germany by 3.7%, Italy by 5.6% and France by 1.5% if Russia’s gas flow through the Nord Stream pipeline were to stop. Given that the flow has already fallen to his 20% of production capacity, we can conclude that QNB has already taken a considerable hit to her GDP from the fall in industrial production in Europe.
Third, the QNB considers implications for monetary policy. Both the European Central Bank (ECB) and the Bank of England (BoE) are lagging behind the series of aggressive rate hikes being implemented by the US Federal Reserve (Fed). This puts downward pressure on the Euro and British Pound, which have already fallen against the US Dollar. In addition to the fact that European inflation is more sensitive to energy prices and is higher in Europe than in the United States, weaker currencies are adding to inflationary pressures. Therefore, it will be very difficult for either the ECB or the BoE to avoid a significant interest rate hike, despite the very realistic prospect of a sharp slowdown in GDP growth.
Finally, fiscal policy will not help for two reasons. First, compared to pre-pandemic, governments are operating at higher deficits and debt levels, with limited fiscal space. Second, governments cannot provide broad support to all businesses and households without boosting both energy demand and inflation. Financial support should therefore be limited and targeted, with direct payments to the most vulnerable businesses and households.
In conclusion, weak consumer demand, restrained industrial production, tighter monetary policy and limited fiscal support mean that the European economy faces some serious headwinds. All of these headwinds are caused or exacerbated by high energy prices and/or restrictions on gas imports from Russia due to the war in Ukraine. It seems more and more likely that the war will continue until his 2023. This means that a recession in Europe is more likely, and that inflation is likely to remain persistently high into next year.
