Gas supply crisis to push Germany into recession – Deutsche Bank analysts

Russia’s cuts to natural gas supplies and the wider economic fallout from the war against Ukraine will push the German economy into recession, analysts at Deutsche Bank forecast. “A likely further decline in Russian gas supply after the maintenance of Nord Stream 1 will necessitate additional savings by households and companies,” the analysts wrote in their research note. “While we do not expect a full rationing, we believe the economic consequences will, together with a U.S. recession and other headwinds, push Germany into a recession in [the second half of] 2022.”

The government has been working frantically to prepare Germany for an end to Russian gas supply since the attack on Ukraine in February, initiating supply contracts with countries such as Qatar, speeding up the process for national LNG ports, pushing through legislation to boost renewables’ built-up, and even re-starting some of the coal-fired power stations set for decommissioning as part of the coal exit.

The Deutsche Bank analysts expect the economy to start shrinking in the second half of 2022, cutting short the previously widely expected recovery after two years of pandemic. They predict the economy to shrink by around 1 percent in 2023 as soaring prices also hurt consumers’ ability to spend. This scenario is based on the assumption that Russia only gradually slows the supply. “If Russia stops all gas supplies to Germany after the current maintenance period, we believe a rationing of gas cannot be prevented during the winter months,” the analysts wrote. Such a scenario would create an economic slump worse than the pandemic crisis and a decline in GDP by 5 to 6 percent next year, they said.

In a half-year assessment published on 14 July, the German government said that the economy has so far weathered the multiple crises relatively well. Now, the war and the uncertainty over gas was “significantly” darkening the outlook.

Economy and climate minister Robert Habeck has been preparing citizens and industry for emergency measures. Russia supplied 55 percent of Germany’s natural gas before the war, creating a widely criticised dependency. Many observers fear that gas shortages will hit key industry sectors such as chemical companies hard, and also hurt private households due to natural gas being the dominant energy source for heating.

The Deutsche Bank analysts said the break with Russia as a natural gas supplier could also cloud the country’s longer-term prospects. “The gas crisis and the switch from quite cheap (Russian) pipeline gas to more expensive LNG could turn out to be a structural game changer for the export-oriented business model,” they wrote.

Germany had also long bet on natural gas as a “bridging” fuel during its energy transition and exit from coal-fired power generation to a renewables-based energy system. The government and many energy experts are now making the case for a faster energy transition despite the temporary re-start of some coal-fired power plants.