Germany may enter recession due to a gas supply crisis

germany-may-enter-recession-due-to-a-gas-supply-crisis

Analysts at Deutsche Bank predict that the German economy will enter a recession as a result of Russia’s restrictions to natural gas supplies and the larger economic consequences from the conflict with Ukraine. „An anticipated further drop in Russian gas supplies after the maintenance of Nord Stream 1 would require consumers and businesses to make extra savings,“ the analysts stated in a research note. While we do not anticipate a complete rationing, we estimate that the economic repercussions, along with a U.S. recession and other headwinds, will force Germany into a recession in the second half of 2022.

Since the beginning of the conflict between Russia and Ukraine in February, the government has been working feverishly to prepare Germany for an end to Russian gas supply by initiating supply contracts with countries such as Qatar, accelerating the process for national LNG ports, pushing through legislation to boost renewables‘ built-up, and re-starting some of the coal-fired power stations slated for decommissioning as part of the coal exit.

After two years of expansion, Deutsche Bank analysts anticipate that the economy will begin to contract in the second half of 2022, cutting short the previously anticipated recovery. They anticipate that the GDP will contract by around 1 percent in 2023 due to the impact of rising prices on consumer spending. This scenario is predicated on the premise that Russia’s supply reduction will be gradual. „If Russia ceases all gas supplies to Germany beyond the present maintenance period, we believe winter gas rationing cannot be avoided,“ the analysts stated. According to them, such a scenario would result in an economic downturn worse than the pandemic crisis and a 5 to 6 percent decrease in GDP next year.

In a midyear evaluation released on July 14, the German government stated that the economy has thus far fared relatively well in the face of several problems. Now, the war and gas uncertainties were „substantially“ clouding the picture.

Robert Habeck, minister of the economy and the environment, has been preparing citizens and businesses for emergency measures. Before the war, Russia supplied 55% of Germany’s natural gas, establishing a reliance that was widely criticized. Numerous analysts are concerned that gas shortages will have a severe impact on major economic sectors, such as chemical firms, as well as individual residences, as natural gas is the predominant heating source.

Analysts at Deutsche Bank stated that severing ties with Russia as a natural gas provider could also diminish the nation’s long-term prospects. „The gas crisis and the transition from relatively inexpensive (Russian) pipeline gas to more expensive LNG could be a structural game-changer for the export-oriented business model,“ they stated.

Germany had long relied on natural gas as a „bridging“ fuel during its energy transition and transition away from coal-fired power generation towards a renewables-based energy system. In spite of the temporary restart of several coal-fired power plants, the government and numerous energy experts are currently arguing for a speedier energy transition. The most recent events have caused a great deal of concern among a large number of people all around the world, and a lot of those individuals are beginning to give up hope because no one knows how much longer we will have to suffer through this energy crisis.

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