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Soaring fuel prices triggered by Russia’s war in Ukraine and western embargoes on trade with Russia pose what could be the greatest economic threat to Europe in almost 50 years, the Financial Times reported.
While having fallen back from their 20 percent since Russia’s invasion, European officials are rushing a new plan to slash Russian natural gas imports by two-thirds by the end of this year, Bloomberg reported.
Europe receives almost 40 percent of its gas from Russia, much through the Nord Stream 1 pipeline, which Russia has threatened to close in retaliation for the western allies’ trade embargo.
“The post-COVID recovery will surely be significantly delayed, with a clear risk that we could be heading into a period of stagflation, if not recession with inflation,” Erik Nielsen, an economic advisor to Italian banking group Unicredit, warned in a comment to the FT.
Recession with inflation is the definition of dragflation, one of our Top 2022 Trends, in which economies shrink while prices keep rising.
Europe would have to enact “massive” fuel and energy subsidies to prevent a recession if Russian gas disappears, Blackrock portfolio Rupert Harrison told the FT. Harrison is a former advisor to Britain’s treasury department.
A European recession would be “inevitable” if the continent loses all its fuel imports from Russia, according to Capital Economics’ chief economist Neil Shearing.
For now, the research firm has shaved 1 percent point off its European growth forecast for this year.
In a worst-case scenario, Europe will lose 3.2 percent in economic growth this year, Oxford Economics predicted, compared to what it would have achieved if Russia had not attacked Ukraine.
So far, Oxford still expects the Eurozone’s GDP to expand by 2.2 percent this year and 0.9 percent in 2023.
There are two sources for such optimism, the FT noted.
First, Europe is far less reliant on fossil fuels than it was during the 1973 oil embargo, when OPEC shut off oil exports to countries that supported Israel during the Yom Kippur War.
Germany has massively expanded its solar energy installations, while France now derives much of its electricity from nuclear power plants.
Second, economies are vastly more fuel efficient now, producing twice as many goods per barrel of oil than they did 50 years ago.
Today’s soaring energy prices will reduce global growth by only 1 percent by 2024, but do far more damage in Europe, according to a new analysis by Britain’s National Institute of Economic and Social Research.
Still, the institute does not foresee a European recession.
“We expect higher public spending to support a massive inflow of asylum seekers from Ukraine and to bolster military spending, which will limit adverse effects on European GDP,” the analysis said.
Other economists also expect governments and central banks to offer various forms of support to prop up their national economies as prices for energy and other commodities stay at stratospheric levels, the FT said.
Rising oil prices also soften the blow that western sanctions impose on Russia’s economy.
Russia recently signed a deal boosting oil sales to China and continues to sell oil elsewhere, giving it desperately needed income.
The U.S. dollar is the currency in which oil is traded, so the sales also give Russia a source of hard currency at a time when the ruble has become worthless.
Rocketing oil prices also take money from oil consumers and redistribute it to producers, meaning that advanced economies that lack oil reserves, such as Europe and Japan, will be hardest hit as crude prices climb.
Poor nations that lack fossil fuel deposits also will pay a heavy price, both in their energy imports and the damage those higher costs will do to their already-fragile economies.
TREND FORECAST: Western sanctions and shippers’ reluctance to sail the war zone that the Black Sea has become, will force oil prices higher for at least the next several months as Europe labors to lock down new sources of fuel.
Higher fuel prices pervade an economy. Therefore, prices across sectors will continue to rise through European economies, slashing consumption, weakening GDPs, and spinning Europe toward a recession by the end of this year.
This trend can be reversed if a peace deal is made between Russia and Ukraine and the U.S. and NATO abandon the wide array of sanctions they have imposed on Moscow.