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Germany imports almost 60% of its gas needs from Russia. Economists say stopping supply would bring a sudden recession

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In their biannual joint economic forecast, Germany’s top five economic institutes have drastically lowered their gross domestic product forecasts as war in Ukraine slows recovery from the Covid-19 pandemic.

Germany’s RWI, Berlin’s DIW, Munich’s Ifo Institute, Kiel’s IfW and Halle’s IWH now expect Germany’s GDP to grow by 2.7% in 2022 and 3.1% in 2023, assuming no more. a further economic escalation linked to the war in Ukraine and that Russian gas flows to Europe from Russia will continue.

Institutes have previously forecast economic growth of 4.8% in 2022.

Ukrainian President Volodymyr Zelensky and the European Parliament have called on the European Union to impose a total embargo on Russian oil, gas and coal imports in light of the atrocities committed by Russian forces in Ukraine against civilians.

The EU intends to ban Russian coal imports and is working on sanctions against Russian oil as it seeks to exclude the Kremlin from the global economy, while Russian President Vladimir Putin has also repeatedly threatened to cut off gas supplies to Europe. .

However, economists expect that such a move will have serious economic consequences for both sides.

In 2020, Germany bought 58.9% of Russia’s natural gas, according to the European Institute of Statistics.

The Nord Stream 2 pipeline, a $ 11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned.

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Germany has completely stopped pipeline certification after Russia officially recognized two pro-Russian regions in eastern Ukraine, creating a pretext for the ensuing invasion.

In the event of a complete shutdown of Russia’s energy supply, German institutes have predicted a cumulative loss this year and next of about 220 billion euros ($ 238 billion), the equivalent of more than 6.5% of annual economic output. This would lead to economic growth of just 1.9% this year and a contraction of 2.2% in 2023.

“If the gas supply were cut off, the German economy would go through a sudden recession. In terms of economic policy, then it would be important to support marketable production structures without stopping structural change, “said Stefan Kooths, vice president and director of research for business cycles and growth at the Kiel Institute.

The European Central Bank faces a unique challenge of controlling record inflation without stopping already weakened economic growth, which will be further affected by supply shocks as the war in Ukraine continues.

Eurozone inflation reached 7.5% in March on an annual basis, according to Eurostat, and German institutes forecast an annual average of 6.1% in 2022, the highest in 40 years.

In the event of a power outage, economists predict an increase to a post-war record high of 7.3%. Inflation of 2.8% for next year will also remain well above the post-reunification average and will reach 5% in the event of a power outage, the report said.

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“The shock waves of the war in Ukraine affect economic activity on both the supply and demand sides. Government stimulus packages during the pandemic have already had an inflationary effect. Rising prices for critical energy goods following the Russian invasion further fuel upward pressure on prices, “Kooths said.

The risk of a recession in Europe is much higher than in the US, said Geraldine Sundstrom, portfolio manager at PIMCO. She told CNBC that the risk of a recession in Europe is much higher than in the US at this stage.

“The European economy is not in the same strong position as the US and the potential industrial recession could be on the verge of Europe, depending on the disruption caused by the conflict, what is certainly happening in Asia and we have seen – especially in the sector “A number of factories have had to close due to a lack of parts, and this has led to some workers being sent on holiday to Germany,” Sundstrom said.

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