Last week, Russia cut off gas to five countries in the European Union. This includes Germany, which has the largest economy in the 27-country bloc and relies heavily on gas from Moscow to fuel energy and power industries.
An industry group warned on Tuesday that Germany could go into a recession if Russian gas supplies, which are already low, come to a complete stop. At the same time, Italy said it would think about helping companies fill their gas storage tanks with money to keep the crisis from getting worse this winter.
After Russia’s invasion of Ukraine put energy at the center of an economic fight between Moscow and the West, European Union countries from the Baltic Sea in the north to the Adriatic Sea in the south have proposed plans to deal with a supply problem.
Before the war, as much as 40 percent of the EU’s gas requirements were met by Russia, peaking at 55 percent for Germany, leaving a massive void in an already congested global gas market.
Some nations have temporarily reversed plans to dismantle coal-fired power stations in response.
Gas prices have reached all-time highs. This has caused inflation to go up and made it harder for policymakers to pull Europe’s economy back from the edge.
On Tuesday, Germany’s BDI industrial organization lowered its economic growth prediction for 2022 to 1.5% from 3.5% before the conflict began on February 24. It is stated that a halt in Russian gas deliveries will inevitably cause a recession in Europe’s largest economy.
The IWH economic research institute, which is part of a group of institutes that advise the German government, also lowered its prediction to 1.5 percent.
In March, it was expected that growth would be 3.1%.
The institute thought that the economy would have a hard time this summer because there would be a shortage of supplies in industry and inflation would lower private demand.
Other institutions have also decreased their predictions, with IFo reducing its 2022 forecast from 3.1% to 2.5% last week and IfW holding its forecast unchanged at 2.1%.
Due to the war in Ukraine, Germany’s economy, Europe’s largest, will likely grow more slowly than anticipated this year, according to the Ifo institute.
The institute downgraded Germany’s 2022 GDP forecast from 3.1 percent in March to 2.5 percent, while raising its inflation forecast from 5.1 percent to 6.8 percent.
Ifo economist Timo Wollmershaeuser said, “At the start of the year, high prices contributed to a loss of purchasing power among private families, which resulted in a decrease in goods consumption.”
The German economy grew a little bit in the first three months of this year thanks to more investment. However, Russia’s invasion of Ukraine started to hurt the economy more at the end of February, not long after it started.
“Economic output is currently 1% below where it was before the pandemic in late 2019,” he said. “But we expect commodity prices and material shortages to go down gradually in the second half of this year.”
Ifo forecasts that the German economy will rise by 3.7% in 2024.
Separately, Germany’s IfW economic agency increased its projection for German inflation this year from 5.8 percent to 7.4 percent. IfW increased its inflation forecast for 2024 from 3.4 percent to 4.2 percent.
IfW, one of Germany’s leading institutions and part of a government advisory group, has maintained its projection for GDP growth at 2.1% for this year. It did, however, lower its 2024 forecast from 3.5 percent to 3.3 percent.
A report from the IfW says that “excessive inflation has a significant effect on the purchasing power of disposable earnings.” Because of this, real disposable incomes will drop sharply this year.
Russian gas continues to be pumped through Ukraine, but at a decreased rate. The Nord Stream 1 pipeline, a vital supply route to Germany, is only running at 40% capacity.
Moscow says that sanctions from the West make it hard to fix things, while Europe says that this is just an excuse to cut flows.
Robert Habeck, the German Minister of the Economy, stated that the curtailed supplies constituted an economic attack and were part of Russian President Vladimir Putin’s aim to instill terror.
“This is a new dimension,” said Habeck. This method cannot be permitted to be successful.
The slowdown has hindered Europe’s efforts to replenish storage tanks, which are currently roughly 55 percent full, to fulfill an EU-wide goal of 80 percent by October and 90 percent by November, a level that would enable the bloc to survive the winter if supplies were disrupted further.
Eni (ENI.MI) said on Tuesday that gas flows from Russia have been low for more than a week, which led the Italian government to announce early steps to store more gas.
Roberto Cingolani, minister of ecological transition, stated in a statement that the government intended to purchase coal if it became necessary to employ coal-fired power stations to conserve natural gas.
Cingolani also asked that the company in charge of the gas grid, Snam (SRG.MI), take steps to help get gas stockpiles close to their June goal level.
The benchmark gas price for Europe was around 126 euros ($133) per megawatt hour (MWh), which was less than this year’s high of 335 euros but up more than 300 percent from a year earlier.
Austria, Denmark, Germany, and the Netherlands are among the countries outside of Italy that have started the first step of a three-step plan to deal with a gas supply problem.
In the coming weeks, the German gas regulator, Bundesnetzagentur, will implement a new auction system to encourage firms to consume less gas.
The chief of the Bundesnetzagentur questioned if the country could survive the winter with present gas deliveries. He had said before that it was too soon to declare an all-out emergency, which is the third step of the crisis plan.
On the margins of an industry event, Bundesnetzagentur President Klaus Mueller stated, “As things stand, we have a problem.”
Markus Krebber, CEO of RWE Â Germany’s largest power company, said that Europe doesn’t have much time to plan.
“How would we re-distribute gas if the supply was completely cut off?” There is now no plan… at the European level… because each nation is examining its emergency plan. ” He repeated the same story.
Europe cannot meet all of its needs with liquefied natural gas (LNG), a market that was already oversaturated before the Ukraine conflict.
Disruptions at a significant U.S. LNG producer added to the difficulty.
Europe is looking for more pipeline supplies from its producers, like Norway, and from other countries, like Azerbaijan, even though most producers have already reached their maximum output.
Even Sweden, which doesn’t use much energy, has joined its European friends in putting the first part of its plan to deal with the energy crisis into action.
The state energy agency said that supplies remained abundant but warned “industry participants and gas customers connected to the western Swedish gas network that the gas market is constrained and that a deteriorating gas supply situation may develop.”
Sweden, whose gas contributed 3% of total energy consumption in 2020, relies on piped gas supplies from Denmark, where storage tanks are currently 75% full. On Monday, Denmark triggered the initial phase of its emergency plan.
