The Economics

Search, Explore, Discover
Saturday, May 21, 2022

Germany’s economy is expected to contract under a Russian gas embargo

Germany’s economy is expected to contract under a Russian gas embargo

An embargo on Russian natural gas could cause Germany’s economic output to drop as much as 5 percent this year, the Bundesbank warned on Friday, potentially driving the country into a recession while pushing up already high consumer prices.
The central bank’s predictions, largely in line with those of several economic institutes, also served as a warning of the danger that Europe’s largest economy could face if Russia decides to cut off gas exports to Europe.

The central bank said its predictions were couched in uncertainty, given the unpredictable nature of the crisis surrounding Russia’s invasion of Ukraine. But its economic modeling showed that cutting off Russian natural gas, which before the war accounted for 55 percent of Germany’s supplies, would cause gross domestic product for the year to shrink 2 percent instead of growing by 3 percent.

“Natural gas prices are likely to rise the most, as Russian deliveries are difficult to replace in the short term,” the bank said. Roughly a third of all natural gas is used for industrial production, including steel and chemicals.

This week, the International Monetary Fund warned that the war in Ukraine would drag down the eurozone economy. It downgraded its forecast of economic growth to 2.8 percent from the 3.9 percent it had predicted in January.

Treasury Secretary Janet L. Yellen also warned that a ban on Russian gas could have a “counterintuitive” effect and harm Europe’s economy more than Russia’s by driving up the global price of fuel.

“Europe clearly needs to reduce its dependence on Russia with respect to energy,” Ms. Yellen told reporters in Washington on Thursday. “But we need to be careful when we think about a complete European ban.”

The European Union has banned Russian coal and is preparing a plan to embargo Russian oil. Although Germany has said it is working to end imports of Russian oil this year, it has been reluctant to move more quickly. Last year, Germany imported about a third of its crude oil from Russia.
Newsletter

Related Articles

The Economics
×