BAKU, Azerbaijan, July 30. The immediate consequence of lower gas flows from Russia to Europe will be higher energy bills and an increased likelihood of recession, Trend reports with reference to Capital Economics, UK-based research and consulting company.
“European natural gas (TTF) prices have doubled since mid-June and hit €200 per MWh this week after Russia cut supplies to 20 percent of capacity through the Nord Stream 1 pipeline. The immediate impact will be higher energy bills in most countries. Headline inflation actually might not rise that much further as the large increases in gas prices seen over the past year drop out of the year-on-year comparison – in Poland, for example, gas CPI inflation may increase from 50 percent y/y now to 60 percent y/y by year-end if gas stays at its current level,” said the company.
Capital Economics notes that households’ energy bills will still be higher and take up a larger share of income, which will weigh on non-energy spending.
“On top of this, there is the risk that reduced supply from Russia results in rationing this winter. This week EU leaders reached a deal for countries to cut their gas consumption by 15 percent from August to March. We think those in Southern Europe, including Romania, Croatia and Turkey, would probably be least affected by gas shortages. Poland and Bulgaria would experience a large hit to GDP in the event of Europe-wide shortages. Czechia, Slovakia and Hungary are the most vulnerable and in a worst case scenario may have to cut gas supplies to industry, resulting in falls in industrial production of more than 10 percent and GDP losses of 5 percent,” reads the latest report from Capital Economics.
The report reveals that the risk of energy shortages during the winter is just one of a growing list of headwinds facing the region and the latest data tell a clear story.
“Industrial production and retail sales fell quite sharply m/m in Poland and Lithuania in June. The EC’s economic sentiment indicators for CEE declined again in July and are consistent with regional GDP stagnating at the start of Q3. The manufacturing PMIs for July next week are likely to tell a similar story and point to weakness in industry. Even without energy rationing, some economies will likely enter recession this year, including Slovakia and Czechia, and we think GDP will contract in other countries too, including Poland and Hungary,” said the company.