The Eurozone moves away from the risk of a deep winter recession

The likelihood of the eurozone slipping into a deep recession this winter is falling, according to economists, who have trimmed their forecasts as greater fiscal support from governments, lower gas prices and a mild autumn help boost the bloc’s prospects to enhance.

Most forecasters still expect euro-zone manufacturing to contract in the coming quarters. The European Commission said earlier this month that it expects the economy to contract by 0.5 percent in the fourth quarter and 0.1 percent in the first three months of next year – in line with estimates by private sector analysts.

However, the downturn will be more moderate than previously feared. forecast economists Eurozone growth of 3.2 percent for 2022 overall – down from a previous forecast of 2.7 percent in July, according to Consensus Economics’ latest compilation of forecasts, which also reflects the bloc’s better-than-expected resilience in the three months to September.

“The eurozone recession is unlikely to be as deep as feared,” said Hargreaves Lansdown’s Susannah Streeter. “The bloc will avoid a full-blown energy crisis this winter.”

Bar chart of average GDP estimate (month-to-month change in percentage points) showing that economists have upgraded their growth forecasts for 2022

Moscow’s summer shutdown of the key Nord Stream 1 gas pipeline fueled fears that the region would struggle to replace Russian energy sources and pushed up gas prices. But one of the mildest Octobers on record has seen homes and factories using less electricity, helping gas storage facilities operate at near full capacity.

In the first week of November, gas consumption in the three largest eurozone economies – Germany, France and Italy – fell by 30 percent from the 2017-2021 average, according to ENTSO-E data.

Holger Schmieding, chief economist at Berenberg Bank, in September forecast a 2.1 percent decline for the three quarters to mid-2023, based on a gas price of 220 euros per MWh for this winter and fears of power outages.

Since then, however, the European gas wholesale price has fallen below EUR 110 per MWh and Schmieding has revised its forecast for the extent of the decline to 1.6 percent. Success in filling gas storage facilities to full capacity has also allayed fears that the industry could face periods of power outage.

Line chart of the Dutch day-ahead contract, € per MWh, showing that European gas prices have fallen

The risk balance of his forecasts “now tilts up rather than down,” he said.

Goldman Sachs this week revised its forecast for the same period, expecting a 0.7 percent decline in output from a previous forecast of a 1 percent fall in production.

Lower gas prices, less risk of energy rationing and additional fiscal support from governments point to “a shallower recession,” said Sven Jari Stehn, chief economist for Europe at Goldman Sachs.

Production in the euro zone increased by 0.7 percent in the second quarter of this year and by 0.2 percent in the third. Resilience so far meant there would be more “carryover” of economic activity into this winter, said Silvia Ardagna, chief economist for Europe at Barclays.

Ardagna forecast a 1.3 percent peak-to-bottom contraction in gross domestic product between the current quarter and the third quarter of 2023, down from a previous estimate of 1.7 percent.

“Gas stocks are high enough that there is little risk of outright rationing this winter,” said Andrew Kenningham, economist at Capital Economics, adding that the auto sector’s recovery has been stronger than expected.

Melanie Debono, economist at Pantheon Macroeconomics, also upgraded her forecast to a “shallower recession” in part because of milder winter weather.

However, economists are growing increasingly gloomy about the outlook for next winter and now believe eurozone output will contract by 0.1 percent in 2023 – a sharp downgrade from the 2.3 percent growth that briefly peaked in March expected after Russia invaded Ukraine.

Bar chart of average GDP estimate (percentage point change month-to-month) showing that forecasts for next year are deteriorating

Economists fear that with Russian gas supplies still limited, it will be much harder to refill Europe’s storage capacity for next winter.

Goldman Sachs has revised downwards its forecasts for next year overall – along with early 2024.

Column chart of Eurozone GDP estimates by forecast date (annual percentage change), showing more optimism for 2022 versus a gloomier forecast for 2023

It will also take time for the fall in wholesale energy prices to sink in to consumers. “Any recovery is likely to be slow and drawn out,” said Paul Hollingsworth, chief economist for Europe at BNP Paribas.

Axa’s chief economist Gilles Moec warned that consumer spending was being “mechanically” hit by high inflation, which hit a new record high of 10.6 percent in October. “Possibly [this winter will be] less bad, but we are still on our way to a painful recession in my opinion.”

Diagrams by Rafe Uddin

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