Europe’s economy will be hit by a number of factors, including falling demand in the US – its biggest export market – the ongoing fallout from Russia’s invasion of Ukraine and related increases in food and energy prices, according to Nomura , a Japanese investment bank with significant operations in London. Nomura said it expects the European economy to start contracting during the second half of 2022 and the recession to continue until the summer of 2023, with an overall contraction of 1.7% in GDP. Energy prices had already risen in the second half of 2021 as leading economies lifted coronavirus lockdowns, but Russia’s invasion of Ukraine has added an extra layer of difficulty as the EU, US and UK tried to to isolate Russia economically. Europe remains heavily dependent on Russia for its energy supplies, and Vladimir Putin has responded to the sanctions by slowing gas supplies. Russia cut gas supplies through the Nord Stream 1 pipeline to Germany and the TurkStream pipeline to Bulgaria, and cut off supplies to Poland through the Yamal pipeline. Europe is struggling with “conditions that are very global in nature (rising energy prices and inflation, increasing geopolitical risks and uncertainty), which makes us believe that European economies will suffer the same fate – recession – as the US”, wrote George Buckley, economist at Nomura. Inflation in the eurozone hit an annual rate of 8.6% in June, the highest since the bloc was created in 1999. Analysts at JP Morgan Chase, the US investment bank, said last week that Russia could also trigger “stratospheric” increases in oil prices if it used production cuts to respond to efforts to contain prices by its group of major economies. G7. Analysts including Natasha Kaneva wrote that prices could more than triple to $380 (£314) a barrel if Russia cuts production by 5 million barrels a day. A barrel of Brent crude oil for September delivery was worth $111 at the end of last week in futures markets. “It is possible that the [Russian] The government could respond by cutting output as a way to inflict pain on the West,” JP Morgan analysts wrote. “Global oil market tightness is on Russia’s side.” Kay Neufeld and Jonas Keck, economists at the Center for Economic and Business Research, said Russia’s invasion of Ukraine had created “a real pan-European crisis” and said there was at least a two-in-five chance of a European recession. Germany, Europe’s largest economy, is particularly vulnerable due to Russia’s control of the Nord Stream 1 pipeline. The pipeline is scheduled to shut down for a 10-day period starting July 11 for scheduled annual maintenance. German Economy Minister Robert Habeck told German media last week that the government fears Russia will refuse to reopen the pipeline, a move that could cause shortages in the winter. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk “It seems clear that in the case of European gas shortages, a severe recession will be almost certain,” Neufeld and Keck wrote. “This is because European countries are connected to each other not only through energy interconnections but also through highly integrated supply chains. “Tight gas supplies will lead to further increases in energy prices for consumers, adding to inflationary pressures and claiming an even greater share of household disposable income, which is itself a recessionary risk.” European countries dependent on Russian gas are struggling to find alternative supplies. The German government hopes two floating terminals that can accept liquid natural gas will be operational this winter. While the UK does not import gas directly from Russia, European shortages could exacerbate the cost of living crisis by raising the price of gas on open markets. This would force the UK to pay more, a cost likely to be reflected in bills for consumers and businesses. Nomura has forecast UK GDP to fall by 1.5% during an expected recession.
