Energy crunch will trigger eurozone contraction in 2023, economists warn

The eurozone economy is expected to slow next year as inflation and energy shortages are likely to trigger a recession and lead to changes in the labor market, according to a Financial Times survey of economists.

Almost 90 per cent of the 37 economists the FT polled said they thought the financial sector had already fallen and many predicted that the domestic economy would shrink throughout next year.

“European oil markets remain highly volatile,” said Chiara Zangarelli, chief economist at Morgan Stanley. “Further supply disruptions, or extreme cold weather, could cause tensions and prices to rise again, forcing further changes and damaging effects.”

Many economists said they thought Europe had passed its worst crisis, which was triggered by Russia’s invasion of Ukraine. A mild fall allowed gas stations to remain near full capacity.

Eurozone gross domestic product (% change) chart shows economists are more pessimistic about 2023 growth than the EU or ECB

However, many fear that the prospect of energy supplies could return next year, especially if this winter is unusually cold, supplies run out, or if gas flows from Russia decline in 2023.

“The danger of the tail of the gas distribution may have been avoided this winter, but the question of the energy supply next winter is still open,” said Sylvain Broyer, economist for Europe, the Middle East and Africa at S & P Global Ratings.

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European countries have managed to reduce their dependence on Russian gas by turning to Norway, the US and the Middle East, as well as switching to alternative energy sources. But economists warn that, without Russian resources, it will be very difficult to fill the gas storage facilities needed by Europe this coming winter.

Carsten Brzeski, head of senior research at ING Bank, said: “There is a risk of power failure this winter. And the coming winter will be very difficult.”

The recession, combined with the highest mortgage rates in Europe, is also expected to bring about significant changes in the housing market in the region. The European Central Bank raised rates by 2.5 percent in 2022 and is expected to increase borrowing costs in 2023.

Predictions for the previous year

The majority of economists polled by the FT last year identified higher inflation expectations as a major risk. However, none of them expected the magnitude of the energy price shocks that have made inflation so high in the bloc.

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On average, he predicted that prices will rise by 2.7 percent this year. Inflation rose to double-digit levels in the autumn, with the ECB recently forecasting an 8.4 percent rate for the rest of the year. This is even higher than last year’s highest forecast, which was predicted by Nick Bosanquet, professor of public health at Imperial College London.

The forecasters were also more optimistic. They forecast growth of just 4 percent for 2022, which is higher than the 3.4 percent forecast by the ECB earlier this month.

On average, economists have predicted that eurozone housing prices will fall by 4.7 percent next year. Maria Demertzis, senior partner at the Bruegel think-tank, said house prices “will not continue to rise if we are in danger and interest rates are increasing”.

Economists polled by the FT predicted the eurozone economy would shrink by 0.01 percent next year. This is less optimistic than the European Commission and the ECB, which predicted that the bloc’s economy will grow by 0.3% and 0.5% next year respectively.

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Marcello Messori, a professor of economics at the Luiss University in Rome, said that an increase in interest rates by the ECB in order to combat the “severe increase in inflation” caused by the electricity shock caused by the Russian invasion of Ukraine “could cause the economy to collapse.” very much.” the euro area”.

The inflation rate in the eurozone is expected to remain above the ECB’s 2 percent rate for at least two years, according to economists. On average, respondents expect prices to rise by 6 percent next year and about 2.7 percent in 2024.

The forecast is lower than that of the ECB, which earlier this month predicted rates would rise 6.3 percent next year and 3.4 percent in 2024.

A line chart of the Eurozone synthesis index of consumers (% change) showing Economists think the ECB is weighing future rate cuts

Wage growth is expected to be 4.4 percent next year, according to the median forecast of the FT survey, which is below the ECB’s 5.2 percent.

On average, economists have predicted that unemployment will rise from 6.5 percent in the eurozone in October to 7.1 percent by the end of next year.

The unemployment rate in the Eurozone (%) shows the number of unemployed expected to rise

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