If Russian gas supplies were to stop, German economists predicted a recession in Europe's largest economy.
Germany's five biggest economic institutions reduced their gross domestic product forecasts as the war in Ukraine slowed the recovery from Covid-19.
German GDP is expected to grow by 2.5% in 2022, and 3.1% in 2023, assuming there is no further economic escalation related to the war. The growth was previously projected to be 4.8%.
Ukrainian President Volodymyr Zelenskyy and the European Parliament have called for the European Union to impose a total embargo on Russian oil, gas and coal imports.
The EU plans to ban Russian coal imports and is working on sanctions against Russian oil as it looks to ostracize the Kremlin from the global economy, while Russian President Vladimir Putin has threatened to cut off the gas supply to Europe.
Such a move is expected to have dire economic consequences for both sides. According to the European statistics agency, Germany bought 58.9% of its natural gas from Russia in 2020.
The $11 billion project to double the flow of gas between Russia and Germany is no longer going forward. Russia officially recognized two pro-Russian regions in eastern Ukraine, setting the stage for an invasion that would happen.
If the Russian energy supply were to be stopped, the German institute predicted a cumulative loss of 220 billion euros, equivalent to 6.5% of the economic output. This would result in growth of just 1.9% this year and a contraction of 2.2% in three years.
If gas supplies were to be cut off, the German economy would go into a recession. The vice president and research director for business cycles and growth at the Kiel Institute said it would be important to support production structures without stopping structural change.
Even without a boycott, this change will accelerate for gas-intensive industries, as dependence on Russian supplies, which have been available at favorable prices up to now, is to be overcome quickly anyway.
Governments should avoid giving poor targeted transfers in order to cushion higher energy prices.
It will drive up inflation and undermine the effect of higher energy prices if support schemes are handed out on a wide front. He said that this increases the economic costs of low-income households.
The European Central Bank faces a unique challenge of reining in record-high inflation without hurting economic growth, which is likely to be hit further by supply as the war in Ukraine continues.
Euro zone inflation came in at 7.5% for March on an annual basis, according to Eurostat, and the German institutes forecast a full-year average of 6.1%, the highest print in 40 years.
In the event of an energy supply cut-off, they predicted an increase to a post-war record high of 7.3%. The report said that next year's projected rate of 2.8% will be well above the average since reunification, and would rise to 5% in the event of an energy blockade.
The war in Ukraine has had a negative impact on economic activity on both the supply side and the demand side.
The inflationary effect of the GovernmentStimulus packages during the Pandemic was already present. The price of critical energy commodities increased after the Russian invasion.
The risk of a recession in Europe is much higher than in the US, according to a portfolio manager at PIMCO.
The European economy is not as strong as the U.S. one and there is a chance of an industrial recession on the doorstep of Europe.
Europe is facing a very important supply shock and inflationary shock, and even though the risk of a recession in Europe is way bigger than in the U.S., the ECB seems to be more willing to normalize policy.
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