FRANKFURT (Bloomberg/AFP) – The risk of a euro-area recession has reached its highest level since July 2020 as concerns grow that a winter energy squeeze will cause a slump in economic activity.

Economists polled by Bloomberg now put the probability of two straight quarters of contraction at 80% in the next 12 months, up from 60% in a previous survey. Germany, the bloc’s largest economy and among the most exposed to cutbacks in gas supplies, is likely to shrink from as early as this quarter.

Households and companies in Europe are bracing for the possibility of energy rationing after Russia throttled gas shipments to the region and are already contending with record-high inflation rates and other supply bottlenecks. Business surveys signal activity has been contracting since July, with few signs of improvement in the near term.

Inflation is now expected to peak at 9.6% in the final three months of the year, almost five times the European Central Bank’s goal. Respondents don’t see it approaching the 2% target until 2024.

While ECB officials predicted the euro-area economy will only stagnate, not contract, when they updated policy this month, they have increasingly sounded the alarm over the region’s growth and inflation outlook. President Christine Lagarde and her colleagues have justified larger hikes as a sign of their determination to tame price growth, though economists consider their time is running out to take such actions.

Respondents now see the ECB pausing its rate-hiking cycle sooner but lifting interest rates higher to a peak of 2% for the deposit rate by February. Over half expect a 75 basis-point increase at the ECB’s next policy meeting in October.

Chief Economist Philip Lane said last week that the ECB’s unusually large interest-rate hike this month was “appropriate,” while signaling that future steps are likely to get smaller. Other ECB officials told Bloomberg after the latest decision that they weren’t ruling out a further 75 basis-point hike.

 

Signs of Recession 

‘Multiplying’ in Germany 

 

The German central bank said Monday it was increasingly likely that Europe’s largest economy would shrink for a “prolonged” period as Russia throttled energy supplies to the continent.

“The signs of a recession for the German economy are multiplying,” the Bundesbank said in its monthly report, warning of a “broad-based and prolonged decline in economic output”.

The likely slump was above all down to “supply-side constraints”, namely reduced deliveries of energy in the wake of the Russian invasion of Ukraine.

Moscow has dwindled supplies of gas to Europe and kept the Nord Stream pipeline shut since the end of August, heaping pressure on Germany’s economy.

Germany had been highly reliant on Russian energy imports to power its industry and heat its homes, with 55 percent of its gas coming from Russia before the outbreak of the war.

German GDP grew fractionally by 0.1 percent between April and June, but an increasing number of economic indicators, such as business and consumer confidence, have begun to flash red.

The economy would likely shrink “slightly” in the third quarter of the year, the Bundesbank said, before a “marked” drop over the last three months of 2022 and the beginning of 2023.

The Russian gas supply stop meant that the situation on gas markets was “very tense”, it said.

Germany could “avoid formal rationing” of the fuel, but necessary reductions in consumption would lead companies to limit or pause production, the central bank predicted.

The impact was unlikely to be as bad as an “adverse scenario” sketched out by the Bundesbank in June, which foresaw the economy shrinking by 3.2 percent in 2023, it said.

“The outlook is however extremely uncertain,” the Bundesbank said.

The reduction in gas supplies has sent prices for the fuel and for electricity rocketing, spurring decades-high inflation rates.

Consumer prices rose at a 7.9-percent rate in Germany in August, well above the two-percent target of the European Central Bank.