- Europe is poised to enter a deep recession by year-end amid rising natural gas prices and higher interest rates, according to JPMorgan.
- Natural gas imports now account for more than 6% of Europe’s GDP, and that number could climb even higher, the bank said.
- The ECB could have limited stimulus measures to combat rising gas prices as it seeks to tame inflation.
Soaring natural gas prices and more interest rate hikes from the ECB will send Europe into a deep recession by year-end, JPMorgan said in a Tuesday note.
The bank highlighted that revised forecasts showed that Europe is “running out of even more gas” than initially expected as Russia continues to suspend gas exports to the Euro area.
“Any attempt to pin down a macroeconomic forecast [on the] Euro area currently must start with a view on energy and more specifically natural gas prices. But, given the daily moves in these prices, it is hard to get past this first step with any confidence,” JPMorgan’s Greg Fuzesi said.
The bank highlighted that Europe’s energy import costs have quadrupled in recent months, from an annual rate of about €200 billion, or 1.6% of the Euro area’s GDP, to about €800 billion today, or 6.4% of GDP.
Fuzesi said that depending on natural gas supply dynamics, the area’s energy import bill could rise even higher, to about 8.5% of total GDP.
“This is clearly a huge income shock,” Fuzesi said, adding that he expects the higher gas prices to incentivize a reduction in demand while supply shortages won’t be enough to require forced gas rationing.
What complicates matters for Europe’s economy is the fact that inflation is also likely to climb due to higher gas and electricity prices. And that could complicate potential stimulative measures from the European Central Bank.
“Another large increase [in energy prices] feels difficult for policymakers to ignore and therefore a further policy response would likely materialize. However, both the scale and form of this are unclear as, for example, direct income support would reduce the hit to real disposable incomes without acting directly on the inflation profile,” Fuzesi said.
The bank estimates that for every €50/MWh increase on spot gas prices, headline inflation rises by one percentage point.
“It could be more than this,” Fuzesi said, adding that he expects headline inflation to rise above 10% in Europe by the end of the year.
The continued rise in inflation means it will be harder for the ECB to implement a policy pivot anytime soon, and it’s possible it will be forced to keep hiking rates. The bank now expects the ECB to raise its deposit rate by 50 basis points in October, and by 25 basis points in December.
Unless European gas prices fall sharply and quickly, the combination of such high energy prices, rising inflation, and rising interest rates mean an economic recession is imminent.