Europe's descent into an economic contraction looks to have been confirmed with Russia squeezing natural gas supplies to the bloc and heavy industry facing tough rationing
Just days after Europeans breathed a sigh of relief as Russian gas giant Gazprom announced that it would resume supplies through theNord Stream 1 line, it then announced Monday that flows would be reduced again.
In Europe, the announcement that a turbine would be for maintenance was greeted with horror.
Volodymyr Zelenskyy, the president of Ukraine, said the move was akin to a gas war with Europe. Robert Habeck, Germany's Economy Minister, said the excuse that maintenance was the reason for the supply cut was a "farce".
Europe is in a tricky situation due to rampant inflation, the war in Ukraine and an already troubled supply chain.
Germany is the region's largest economy and traditional growth driver. It is mostly dependent on Russian gas and is sliding into a recession. The government is concerned about how it will keep the lights on during the winter. It's time for everyone to know that.
He said that Germany needs to reduce its gas consumption. In a low supply scenario, gas for industries will be reduced before private residences or critical infrastructure.
It is a big concern that this can happen. Production chains in Europe would no longer be made. He said that they need to avoid that with their strength.
Russia can use gas against Europe because of the international sanctions it has been subjected to.
The region has previously received 45% of its annual supplies from Russia and while it desperately tries to seek alternatives, such as U.S. Liquefied Natural Gas, it cannot replace its Russian hydrocarbons fast enough.
Analysts are predicting a difficult winter for the continent if the situation doesn't change.
According to S&P Global Market Intelligence, high energy costs are pushing Western Europe towards recession.
Mild second-quarter contraction in real GDP in the UK, Italy, Spain, and the Netherlands are included in our July forecast. The central banks are increasing the pace of monetary policy tightening because of the unexpected increase in inflation. While a rebound in tourism and consumer services might give the region a slight lift in the summer quarter, another blow is likely in the fourth quarter due to unreliable energy supplies.
Industrial competitiveness will be damaged by high natural gas and electricity prices. The Russia-Ukraine war will likely hurt consumer and business confidence in Europe.
The euro zone's real GDP growth is expected to slow from 5.4% in 2021.
EU governments agreed to ration natural gas in the coming winter in a bid to insulate themselves from further supply cuts by Russia with the bloc's energy ministers approving a draft European law aimed at lowering demand for gas by 15% through the fall and into next spring
EU members have differing opinions about the rationing of gas use and whether the gas savings can be achieved.
Reducing consumption can't do everything. Liquid natural gas is in high demand in Europe. Simon Tucker, global head of energy, utilities and resources at the consulting firm, said in an email Tuesday that rationing can not be ruled out.
The EU countries and the UK need to do all they can to replenish gas stores before the cold starts. The Middle East and North America are seeing an increase in shipments of liquified natural gas. The modernization of their own infrastructure is something that needs to be accelerated. If we are to come out of this crisis stronger, mass deployment of low-carbon, domestic energy alternatives like mini nuclear reactor and community renewable energy is necessary.
Europe is likely to feel more economic pain in the near term due to the program of infrastructure modernization.
The possibility of a recession in Europe now seems clear-cut, with Russia's decision to cut gas flows again likely to have "the consequence of pushing Europe into a deeper recession."
As plans for energy rationing for winter get agreed upon, we expect that tighter financial conditions in Europe will induce a much worse reaction in the real economy. It is snowing in Europe.
There is a chance that Russia could again turn up the taps on its gas flows to Europe once the maintenance of the turbine on the Nord Stream 1 line is complete.
There is a lot of confusion as to whether this will be a short restriction of supply while the repaired turbine makes its way back online or whether the paperwork will never be resolved and we live with only 20% supplies for a long time.
The Russians will know that it will be hard to get this done.
Even if some light rationing was needed, the strategists believed that Germany could make it through the winter. If they cut gas exports it would be a very delicate thing to do politically.
It could be difficult to enforce the 15% reduction that all EU member states have just agreed on. If a plan that can progress is agreed, expect a lot of carve-out and compromises.
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