Eurozone moves away from risk of deep winter recession

Eurozone moves away from risk of deep winter recession

The likelihood of the eurozone falling into a deep recession this winter is receding, say economists who have downgraded their projections as increased fiscal support from governments, lower gasoline prices and a fall soft help to improve the prospects of the block.

Most forecasters still expect eurozone output to contract in the coming quarters. The European Commission said earlier this month that it expects the economy to contract by 0.5% in the fourth quarter and by 0.1% in the first three months of next year. , as estimated by private sector analysts.

But the slowdown will be more moderate than previously feared. Economists forecast eurozone growth of 3.2% for 2022 as a whole – down from a previous projection of 2.7% in July, according to the latest forecast compilation from Consensus Economics which also reflects better than expected resilience in the economy. block over the next three months. September.

“The eurozone recession is unlikely to be as deep as feared,” said Susannah Streeter of asset manager Hargreaves Lansdown. “The bloc is ready to avoid a widespread energy crisis this winter.”

Column chart of average GDP estimate (month-over-month percentage point change) showing economists updated their 2022 growth forecasts

Moscow’s closure of the main Nordstream 1 gas pipeline over the summer stoked fears that the region would struggle to replace Russian energy sources and led to a spike in gas prices. But one of the mildest Octobers on record means households and factories are using less electricity, keeping gas storage facilities close to full capacity.

In the first week of November, gas consumption in the three largest eurozone economies – Germany, France and Italy – fell by 30% compared to the 2017-2021 average, according to ENTSO-E data.

In September, Holger Schmieding, chief economist at Berenberg Bank, predicted a contraction of 2.1% for the three quarters to mid-2023 based on a gas price of €220 per MWh for this winter and fears of power outages.

Since then, however, the wholesale gas price in Europe has fallen to less than €110 per MWh and Schmieding has revised its forecast for the magnitude of the drop to 1.6%. The success of upgrading gas storage facilities to full capacity has also allayed fears that the industry will face periods without power.

Line graph of the Dutch daily contract, € per MWh showing that gas prices in Europe have fallen

The balance of risks to his forecast “now tipped upside rather than downside”, he said.

Goldman Sachs this week changed its forecast for the same period, expecting a contraction of 0.7%, down from an earlier forecast of a 1% drop in production.

Lower gas prices, a reduced risk of energy rationing and additional fiscal support from governments pointed to “a less deep recession”, said Sven Jari Stehn, chief economist for Europe at Goldman Sachs.

Eurozone output rose 0.7% in the second quarter of this year and 0.2% in the third. Until now, resilience has meant there will be more “carryover” of economic activity this winter, said Silvia Ardagna, chief economist for Europe at Barclays.

Ardagna forecasts a 1.3% drop in gross domestic product between the current quarter and the third quarter of 2023, up from an earlier estimate of 1.7%.

“Gas storage is high enough that there is now little risk of outright rationing this winter,” said Andrew Kenningham, an economist at Capital Economics, adding that the auto sector’s recovery had been stronger than expected. .

Melanie Debono, an economist at Pantheon Macroeconomics, also raised her forecast for a “shallower recession” in part because of a milder winter.

However, economists are increasingly gloomy about the outlook for next winter and now believe eurozone output will shrink by 0.1% in 2023 – a sharp decline from the 2.3 expansion. % expected in March, shortly after Russia invaded Ukraine.

Column chart of average GDP estimate (percentage point change from month to month) showing that projections for next year are deteriorating

Economists fear that with supplies of Russian gas expected to remain tight, it will be much more difficult to top up Europe’s storage capacity for next winter.

Goldman Sachs has lowered its forecast for next year overall, as well as for early 2024.

Column chart of Eurozone GDP estimates by forecast date (% annual change) showing More optimism for 2022 contrasted with a gloomier prognosis for 2023

It will also take time for lower wholesale energy prices to trickle down to consumers. “Any recovery is likely to be slow and long,” said Paul Hollingsworth, chief economist for Europe at BNP Paribas.

Axa’s chief economist, Gilles Moec, warned that consumer spending would be “mechanically” hit by high inflation, which hit a new high of 10.6% in October. “Maybe [this winter will be] less severe, but we’re still on the path to a painful recession on my books.

Graphics by Rafe Uddin

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