A recession in Europe in 2023? The gloomy forecasts of the OECD

The Organization for Economic Co-operation and Development published bleak economic forecasts for European countries in 2023 on September 26. Temperatures this winter will play an important role in this scenario. Explanations.

European countries, like the rest of the world, will “pay the price of war” in Ukraine in 2023, predicts the Organization for Economic Co-operation and Development (OECD) in a report published Monday, September 26. “The global growth outlook has clouded over,” writes the organization, which expects global GDP growth of 2.2% for the coming year – compared to 2.8% originally forecast last June.

And the Eurozone occupies a prominent place in this very bleak picture: its growth is experiencing the sharpest revision of any region in the world, forecast at 0.3%, up from 1.6% in June. The OECD also expects a recession scenario for Germany in 2023, i.e. a decline in economic activity for at least two consecutive quarters. Germany’s GDP – Europe’s largest economy – is expected to fall 0.7% next year, while the previous forecast called for a 1.7% rise.

“This OECD forecast is realistic. It is logical to bear in mind that in the eurozone, Germany is likely to suffer the most from the energy shock this winter,” explains Gustavo Horenstein, economist and fund manager at Dorval Asset Management. “The recession that will hit Berlin is expected due to its dependence on Russian gas and the importance of manufacturing to its GDP – a sector very sensitive to energy supply issues.”

Unlike Berlin, its main European neighbors are likely to elude this prospect: Italy is expected to grow by 0.4%, Spain by 1.5% and France by 0.6% – while Bercy still has 1% for its 2023 budget expected, but these OECD forecasts could still be revised downwards depending on the development of the current energy crisis this winter.

“When it’s very cold, supplies run out faster”

“These forecasts are surrounded by significant uncertainties,” notes the organization, which points to the risk of “worsening fuel shortages, particularly gas,” in the event of a particularly severe winter. In this worst-case scenario, the growth forecast for the euro area of ​​0.3% could then be further reduced by a further 1.25 percentage points. As a result, the vast majority of countries in the region would inevitably fall into recession for the whole of 2023.

The recession in several European countries “will depend quite simply on the temperatures this winter,” according to Gustavo Horenstein. “When it’s very cold, supplies run out quicker. The risk is that the demand for gas and electricity for heating is much higher than the production capacities (of these two energies).”

And against the background of already high gas and electricity prices, according to the OECD, there is a risk of bottlenecks this winter: “This could occur if additional non-Russian supplies from non-EU countries do not materialize to the expected extent or gas demand is due to unusually high given the harsh winter weather.”

The organization concedes that EU gas stocks have been “significantly increased” this year – between 80% and 90% in most member states – but could prove to be “insufficient”. “A hard winter could significantly increase scarcity phenomena,” warns the OECD.

The OECD has presented three scenarios regarding the level of European gas stocks in the winter of 2022-2023. © OECD

The International Organization for Economic Studies has also prepared various scenarios related to the level of European gas stocks in the period from October 2022 to April 2023. The first (the green bar) assumes a 10% decrease in gas consumption resulting from the introduction of energy sobriety plans in several European countries. In this case, the supplies would be sufficient for this winter.

In the other two scenarios, the energy situation in Europe would be really tight: with gas consumption similar to the period 2017-2021 (blue bar), there would be an “acute risk of supply disruption” in the energy sector in February 2023. And for the “hard winter” scenario (orange bars) the fall in gas stocks below 30% – which corresponds to a normal operating level – would take place from January.

In addition to the winter weather, the “ability of industry in particular and of European economies in general to control their energy consumption will also be important,” notes Gustavo Horenstein.

“Probably no improvement before 2024”

The staggering rise in energy prices is already threatening the activity of a growing number of energy-intensive industries – some being forced to downsize, such as Duralex and others in the steel industry.

>> Read also: Swimming pools, skiing, industry… these sectors are threatened by the rise in energy prices

“When it comes to energy issues, most governments prioritize households, utilities, hospitals… and productive industry comes last. In the event of a recession, Europe will probably suffer the most damage this winter,” estimates Gustavo Horenstein. In fact, should the energy crisis worsen, gas and electricity savings could hit mostly industries that would impact the eurozone economy by reducing their production – this sector accounted for 23% of Europe’s GDP in 2021, according to the World Bank.

The scenario of a recession across much of the European continent is all the more worrisome given that central banks – like the ECB in early September – are poised to hike interest rates to curb inflation (to 9.1% over a year) in the eurozone in August ). But here, too, the use of this economic lever carries the risk of undermining growth.

“Further interest rate hikes are essential in most major economies to anchor inflation expectations and sustainably reduce inflationary pressures,” the OECD continues to recommend, for which this lever is “a key factor” in the current economic crisis.

The organization also recommends that public policymakers take targeted and temporary fiscal measures to deal with the economic emergency. “Home help is needed to cushion the impact of high energy costs,” the OECD explains. She also points out that the decisions against the rise in gas and electricity prices have so far been “poorly targeted” because they have often benefited too many households and businesses.

But whatever short-term measures are taken, “the reconstruction of the European energy sector will take years,” states Gustavo Horenstein. In the short term, the economist is optimistic, with a winter “which will eventually pass, and with it the acute phase of the energy crisis.” In the medium term, however, he wants to be more cautious: “We will probably go through a difficult time with a strong economic downturn. The recession and the domestic inflation to be fought are ahead of us, we will probably not see an improvement before 2024.”

#recession #Europe #gloomy #forecasts #OECD

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