According to JPMorgan, the impending gas crisis in the eurozone and Italy’s resurgent political issues will cause the region to enter a mild recession by the start of next year and prevent the European Central Bank from raising interest rates further.
The economists at the bank revised their economic projections downward, forecasting that the euro zone’s GDP growth would fall to 0.5 percent this quarter and then decrease by 0.5 percent in both the fourth quarter of this year and the first quarter of the following year. A recession is often defined as a contraction for two consecutive quarters.
The bank stated in a letter on Wednesday that “our updated predictions assume gas prices at 150 euros/MWh,” adding that when paired with pressures like those in Italy, it would result in a 2 percent impact on the euro zone’s GDP. The high cost of gas would also increase headline inflation by 1.2 percentage points in the near term, though it would decline again the following year due to the economy’s adverse response, reducing the amount the ECB would raise rates.
JPMorgan lowered its previous prediction of 75 basis points in three installments and stated, “We estimate the ECB to deliver another 50 basis points of rises by year-end.”
The U.S. bank removed a further 25bp increase that was scheduled for December and stated, “We now forecast 25bp in September and 25bp in October.”
The recession forecast comes on the heels of an IMF warning on Tuesday that essentially no growth will occur in either Europe or the United States in 2019 if Russia totally cuts off its gas supplies to Europe and further reduces its oil exports.
On Monday, Gazprom said that shipments through the Nord Stream 1 pipeline to Germany would reduce to just 20% of capacity, tightening Russia’s grip on Europe’s gas market.
Due to the requirement to cease the functioning of a Siemens gas turbine at a compressor station per directives from an industry inspector, Gazprom said flows would drop to 33 million cubic meters per day starting at 0400 GMT on Wednesday, a halving of the present, already lowered level.
Germany claimed that it did not understand the technical justification behind the most recent cut, which comes as Russia and the West trade economic barbs over what Moscow refers to as its “special military operation” in Ukraine.
With news of the most recent setback for Nord Stream 1 breaking, the European benchmark Dutch front-month gas contract closed 9.95 percent higher. The pipeline is the single largest Russian gas route to Europe, with an annual capacity of 55 billion cubic meters. JPMorgan claimed that its new baseline gas price projection of 150 euros per megawatt-hour (MWh), which is considerably less than the current price of more than 200 euros, required gas flows through Europe’s main Nord Stream 1 pipeline to hold at roughly 40% of typical levels.
By maintaining prices consistently higher, this “may just about escape a considerably larger hit from major gas rationing in Europe,” the bank added. Moscow has nevertheless issued a warning this week that because of additional maintenance concerns, the flows will only reach 20% of their maximum. View More
The biggest prediction is for 2024 and beyond, according to JPMorgan. “There will be more unemployment and a lower GDP level, which supports a disinflationary impulse.”