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Russia's ramped-up gas squeeze means an even deeper recession for Europe — and a sharp winter will pile on the pain, Deutsche Bank warns

Nord Stream 1 pipeline
Russia halted natural gas flows through the Nord Stream 1 pipeline last month.ODD ANDERSEN/Getty Images
  • Europe will suffer an even deeper recession than Deutsche Bank predicted, its strategists said.

  • Russia's indefinite shut-off of a key natural gas pipeline has intensified Europe's energy crisis.

  • That bodes ill for Europe's economy, and a very cold winter will make things worse, they said.

The recession facing Europe will be more severe and drawn-out than previously feared, thanks to Moscow ratcheting up the pressure in energy supplies, Deutsche Bank has warned.

That means European households and businesses should brace for a cold winter of rationing and organized power cuts, as countries struggle with to replace missing Russian gas imports.

"We now foresee a longer and deeper recession than we did in July," the Wall Street bank's strategists said in a research note this week.

While the EU has asked its members to store more gas, Deutsche Bank expects the trading bloc's members to suffer a recession this winter heating season due to higher levels of gas consumption.

In July, Russia's Gazprom slashed its natural gas deliveries to Europe via the Nord Stream 1 pipeline to 20% of capacity. The state-run energy giant completely cut off all the flows at the start of September.

"This escalated the energy supply shock, adding further potential upside to inflation and downside to growth," said the bank's team, led by senior economist Peter Sidorov.

The EU has made policy changes meant to help the 27 countries ease the impact of soaring energy prices, the bank noted.

"However, demand for energy needs to decline, and the baseline call we made in July for a mild recession this winter is now too benign," its team said.

Lower gas supply has sent European natural gas prices soaring, with benchmark Dutch TTF futures up 128% since the start of June. The euro has slid 8.6% to below $0.98 in the same time span.

Deutsche Bank said Europe will need to impose cuts to gas consumption as a result of Moscow's shutoff, and that will lead to significant losses in industrial output. It will also drive up economic uncertainty and have a knock-on impact via trade.

It also expects soaring energy bills to hit Europeans' incomes, leading to a fall in consumer spending.

All told, that could lead to the eurozone's GDP falling by 3% from July to the same month next year, according to the strategists. That would represent a top-to-bottom drop in growth about 50% bigger than the fall during 2009's European sovereign debt crisis.

Two more things could hold back Europe's economy: the impact of an expected recession next year in the US, a close trading partner, and the European Central Bank's interest-rate hikes, which will make it more expensive to borrow.

And there could be further pain ahead for Europe this winter if there's a severe cold snap, Deutsche Bank warned. Some countries could be forced to bring in rationing, while households struggle to pay their heating bills.

"The near-term impact this winter will be most affected by the extent of rationing — whether through enforced cuts or price-based mechanisms — as well as uncertainty effects on consumer and firm behaviour," its strategists said.

While things might improve in the medium term, there will still be tight gas supply and high prices, they said. That will keep weighing on the ability of Europe's businesses and institutions to compete.

"An even sharper winter downturn cannot be ruled out: colder-than-usual weather, amplification of the supply chain shortages triggered by industrial gas cuts, and structural competitiveness concerns are key downside factors," it said.

Read more: This map shows where Europe gets its natural gas - and why economic disaster is looming if Russia cuts off its fuel supply

Read the original article on Business Insider