Recession now likely for Europe amid gas shutdown

A recession may be in the cards for Europe amid the fallout from the disruption of Russian gas imports, says Fitch Ratings.

In a new report, the rating agency said the prospect of a recession in the eurozone now appears likely “as a result of the deepening gas crisis.”

“Economic vulnerabilities to a shut-off of Russian pipeline gas supplies are still very high despite recent aggressive efforts to diversify import sources,” it said.

Specifically, the rating agency said the cessation of Russian gas supplies would have a “significant” supply-side impact due to the lack of short-term substitutes.

On the demand side, household incomes and corporate profit margins would be hit by higher costs.

“Rationing would amplify economic disruptions,” Fitch said. “While widespread rationing across the EU is not inevitable even in a shut-off scenario, it would be a high risk in some countries, including Germany.”

Fitch said a full shutdown of Russian pipeline gas exports to Europe — which would cut GDP in 2023 by an estimated one-and-a-half to two percentage points — now looks increasingly likely.

For Germany the GDP impact is projected at 3%, and Italy would face a 2.5% decline, it said.

This would likely result in a recession that starts in the second half of this year, with Germany and Italy seeing GDP contract in 2023.

Looking ahead, “The economic impact of the gas shock should fade sharply in 2024 as production structures and consumption patterns adjust, and new gas import infrastructure facilities come on stream,” Fitch said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.