Eurozone is in Recession as Ukraine War Threatens Energy Security, Says UBS

Eurozone has slipped into a shallow recession, hammered by rising energy prices in the wake of the Ukraine war, according to economists at UBS Group AG. The report says the 19-nation euro area recession will last through the end of the year.

The euro area economy will contract by 0.1 percent in the third quarter, while the contraction will be 0.2 percent in the fourth, the analysts predicted. However, the UBS analysts upgraded eurozone full-year outlook, citing strong performance in the three months through June.

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Energy Price Increase

"In light of further significant energy-price increases, which imply further pressure on household consumption and fixed investment, we now expect the Eurozone to suffer a technical recession," UBS economists said.

The key driver of the recession is the pressure on commodities. The prices of natural gas, for which most of the euro area countries are more or less dependent on Russia, will keep rising. However, the report says that there will be no severe shortage of natural gas. If gas rationing becomes necessary due to the Russian supply cuts, the fallout on the economy will be too bad.

IMF Warning

Last month the International Monetary Fund (IMF) said that European Union nations are staring at the possibility of recession as a reduction in Russian gas supplies will severely cripple their economies. A total shutdown of Russian gas supplies will lead to as much as a 6 percent drop in GDP of the vulnerable EU countries, IMF had said.

"The prospect of an unprecedented total shutoff is fuelling concern about gas shortages, still higher prices, and economic impacts. While policymakers are moving swiftly, they lack a blueprint to manage and minimise impact," IMF said.

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While Hungary, Slovakia and the Czech Republic are the hardest hit by the Russian supply curbs, the impact is severe for Italy, Germany and Austria as well. The IMF says that a total shutdown of Russian gas will result in the EU economic growth dropping nearly 3 percent over the next 12 months. There are some countries that will suffer little or no impact on growth. These include Sweden, Denmark and Greece. But countries like Italy will suffer as they have high reliance on gas in electricity production, according to the IMF.

More Curbs in Energy Supply

Russian energy giant Gazprom is going ahead with the plan to halt the flow of natural gas flows to Europe at the end of the month. The key energy pipeline for a host of European nations will remain shut for three days, on account of maintenance work, Russian state energy behemoth Gazprom said

The announcement has come as a rude shock to European energy customers who have been looking to shore up gas stocks ahead of the start of the winter. The shutdown will be effective from August 31 to September 2.

Nord Stream gas pipeline
Nord Stream gas pipeline Wikipedia

The Nord Stream pipeline from Russia is running at a fifth of its capacity, underlining the political import Russia attaches to the supply line. While the West accuses Russia of weaponizing gas supplies, Moscow denies the charge, saying sanctions have resulted in the drop in gas supplies to Europe.