Germany, the largest economy in Europe, in particular, is likely to experience a significant economic contraction. The country is heavily dependent on Russian gas and a complete shutdown in Moscow could trigger a severe recession in Germany.
“We assume a recession based on the embargo on Russian oil already in place and the impact of higher commodity prices on the industry,” said Rabobank economist Erik-Jan van Harn. “The German economy is already slowing down and the trend is clearly downward.”
The rising cost of living in Europe is also putting increasing pressure on consumers’ purchasing power and is taking an increasing toll on business. Consumers’ energy bills threaten to rise further if Europe cannot replenish its gas supplies sufficiently for this winter.
The German Chamber of Industry and Commerce (DIHK) warned last weekend that a complete Russian supply freeze could lead to an economic contraction of 10 percent or more in Germany during the winter period. Many companies will have to stop operations if there is no more gas.
According to economists surveyed by Bloomberg, euro area inflation is likely to peak this quarter. By 2024, inflation is expected to have returned to the European Central Bank’s (ECB’s) inflation target of 2 percent. The ECB is expected to have raised the deposit rate to 0.75 percent by the end of the year and to 1.25 percent by March next year. The deposit rate, or the interest at which banks can deposit money with the central bank for a short period of time, is currently minus 0.5 percent.
According to economist James Rossiter of TD Securities, the eurozone is likely to enter a mild recession in the second half of the year. However, the economic contraction will not slow demand enough to bring inflation back to target, putting the ECB on a path of gradual rate hikes, Rossiter said.