He’s been talking about , practically since the invasion of Ukraine began. However, although this was a scenario that was gaining ground, few banks or institutions have included it in their main scenarios until this week. The investment bank Nomura assures that the recession will begin in the euro zone just after this summer and will last for at least a whole year.
Summer will be The economy will be boosted by tourists eager to spend their accumulated savings on trips they have been putting off since the pandemic began. However, autumn and winter will be much tougher seasons for the European economy. The energy strangulation that Russia is practicing on Europe, and the tightening of financial conditions will leave the Eurozone economy knocked out.
The Japanese bank’s economists have modified their forecasts substantially. Nomura forecasts a recession for the Eurozone in his base (most likely) scenario. Until now, the recession was reflected only in the most pessimistic scenarios published by financial institutions, but not in the principal or base.
The deepest recession will be in the Eurozone and the longest in the US
Nomura sees a ‘triple’ recession and almost coordinated between the Eurozone, the UK and the US. “We expect output to contract in both the euro area and the UK…We anticipate an earlier start to the recession in both regions, with the decline beginning in the third quarter of this year and lasting for around a year.” . In the US it will be the longest contraction, with five consecutive quarters of falling GDP.
a year of recession
“We have drastically revised down our forecast for Europe and now see a recession from the second half of this year to the second half of 2023.” The economy is facing a near perfect storm. Several events are going to take place at once that will weigh on growth in Europe: “The combination of a recession in the US; the effect of the war in Ukraine on confidence, inflation and energy supplies; and worsening conditions financial statements explain our forecast”, they maintain from the Japanese bank.
The ECB will start cutting in 2023
Although the European Central Bank has not yet started raising interest rates (the first rise will come in a matter of weeks), analysts are already predicting the first cut. As always, the ECB is late and will have less time to raise rates and therefore less room to lower rates afterwards to fight the next recession. Even if the economy begins to contract this year (high prices and no growth) it will force the central bank to continue raising the price of money, while the economy recedes.
“Despite being a clearly negative supply shock, central banks look…in our view, the ECB will raise all key rates by 25 basis points (bps) in July, 50bps in September, and then 25bps per meeting until March 2023. However, policy will be modestly eased in June 2023 (25 bp rate cut),” the Japanese bank’s economists maintain.
Although a very deep recession is not expected, the Eurozone will (once again) bear the brunt. The total decrease in production will be 1.7%, compared to a fall of 1.5% for the United Kingdom and the US: “Among the largest economies in the euro area, Italy and Germany are the most exposed to a weaker growth in the US through merchandise trade links, Spain being the least”.
There are also other institutions that are even more pessimistic. The London think tank Cebr has published an analysis on Monday in which they warn that “if the gas supply were to run out, governments would choose to close their industries instead of reducing the supply to homes. Therefore, the collateral effects on the economy depend in part on the degree to which gas is used in industrial processes rather than producing electricity or heating homes… despite differences between countries, it seems clear that, in the event of a gas shortage in Europe, a severe recession will be almost a certainty. This is because European countries are connected to each other, not only through energy interconnectors, but also through highly integrated supply chains.”
However, there is hope for the European economy. “One important factor that could potentially limit the scale of the recession in Europe is that there remains a large amount of excess savings accumulated from the pandemic…suggesting that households have plenty of scope to tap into their accumulated liquid wealth.” These savings can be used to cushion the recession or to boost the subsequent economic recovery that should take place in the second part of 2023. When the geopolitical and energy situation improves (if it does), these savings could be the gasoline that drives the recovery of the economy in Europe.
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