recession

European countries, like the whole world, will “pay the price of war” in Ukraine in 2023, predicts the Organization for Economic Co-operation and Development (OECD) in a report posted Monday, September 26. “Global growth prospects have darkened,” writes the organization, which expects global GDP to grow by 2.2% for the coming year – against 2.8% initially forecast last June.

And the euro zone occupies a prominent place in this very dark picture: its growth is undergoing the most significant revision of all the regions of the world, forecast at 0.3% – against 1.6% in June. The OECD also anticipates a recession scenario for Germany in 2023, i.e. a period of decline in its economic activity over at least two consecutive quarters. German GDP – the largest European economy – is expected to plunge next year, down 0.7%, while the previous forecast predicted an increase of 1.7%.

“This OECD forecast is realistic. It is consistent to consider that in the Euro Zone, it is probably Germany that will suffer the most this winter from the energy shock”, explains Gustavo Horenstein, economist and fund manager at Dorval Asset Management. “The recession that will affect Berlin is expected because of its dependence on Russian gas and the importance of the manufacturing industry in its GDP – a sector which is very sensitive to questions of energy supply.”

Unlike Berlin, its main European neighbors should escape this prospect: growth of 0.4% is expected in Italy, 1.5% in Spain and 0.6% in France – while Bercy still expects 1% for its 2023 budget. But these OECD forecasts could still be revised downwards depending on the evolution, this winter, of the current energy crisis.

“If it is very cold, stocks will run out faster”

“Significant uncertainties surround these projections”, notes the organization, which points to a risk of “worsening fuel shortages, in particular gas” in the event of a particularly harsh winter. Growth in the euro zone, forecast at 0.3%, could then be further reduced by an additional 1.25 percentage points in this worst-case scenario. This would then have the effect of inevitably plunging the vast majority of countries in the region into recession for the whole of 2023.

The recession in several European countries “will quite simply depend on the temperatures this winter”, according to Gustavo Horenstein. “If it’s very cold, stocks will run out faster. The risk is that the demand for gas and electricity for heating is much higher than the production capacities (of these two energies).”

And in a context of already high gas and electricity prices, the risk of shortages exists this winter according to the OECD: “This could happen if additional non-Russian supplies from non-EU countries do not materialize to the extent expected, or if gas demand is unusually high due to severe winter weather.”

The organization acknowledges that EU gas stocks have been “significantly boosted” this year – between 80% and 90% in most member states – but may prove to be “insufficient”. “A harsh winter could significantly accentuate shortage phenomena,” warns the OECD.

The international organization for economic studies has also established different scenarios relating to the levels of European gas stocks over the period October 2022 – April 2023. The first (the green bar) assumes a drop of 10% gas consumption, resulting from the implementation of energy conservation plans by several European countries. In this case, stocks would be sufficient for this winter.

In the other two scenarios, the energy situation would become really tight in Europe: in the case of gas consumption similar to the period 2017-2021 (the blue bar), there would be an “acute risk of supply disruption” in energy in February 2023. And for the scenario of a “harsh winter” (the orange bar), the fall in the level of gas stocks below 30% – corresponding to a normal operating level – would take place from January.

In addition to the winter weather, the “capacity of industry in particular, and European economies in general, to manage their energy consumption will also be important”, notes Gustavo Horenstein.

“Probably no improvement before 2024”

The vertiginous rise in energy prices is already threatening the activity of a growing number of energy-intensive industries – some are forced to reduce their activity, like Duralex and others in the steel industry.

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“Most governments, when it comes to dealing with energy issues, prioritize households, utilities, hospitals… and productive industry comes last. In the event of a recession, this is probably where there will be the most damage this winter in Europe”, estimates Gustavo Horenstein. In the event of an aggravation of the energy crisis, gas and electricity savings could in fact primarily affect industries which, by reducing their production, would have an impact on the economy of the Euro Zone – this sector represented 23% of European GDP in 2021, according to the World Bank.

The scenario of a recession across much of the European continent is all the more worrying as central banks – like the ECB at the beginning of September – are firmly committed to raising their interest rates to contain inflation (to 9.1% over one year in the euro zone in August). But the use of this economic lever also presents a risk of undermining growth, here too.

“Further rate hikes are essential in most major economies to anchor inflation expectations and achieve a lasting reduction in inflationary pressures”, still recommends the OECD, for which this lever is “a key factor”. in the current economic downturn.

The organization also recommends that public decision-makers use targeted and temporary budgetary measures to deal with the economic emergency. “Budgetary support is needed to cushion the impact of high energy costs,” explains the OECD. She also points out that, until now, the decisions taken to counter the rise in gas and electricity prices have been “poorly targeted” because they have often benefited too many households and businesses. .

But whatever measures are taken in the short term, “the reconstruction of the European energy sector will take years”, notes Gustavo Horenstein. The economist is optimistic in the short term, with a winter “which will also pass at some point, and the acute phase of the energy crisis with it.” But he wants to be more reserved in the medium term: “We will probably go through a difficult time with a strong economic slowdown. The recession and the domestic inflation to fight are in front of us, we will probably not see an improvement before 2024.”