Russia’s Economic War Hits Europe’s Factories

Since invading Ukraine, Russian President

Vladimir Putin

has weaponized the country’s vast stores of energy to undermine European support for Kyiv. This month, Russia turned off the taps to a key natural-gas pipeline, Nord Stream. As Wednesday’s data showed, Moscow’s choking of energy supplies to Europe has driven up production costs, making it harder for some manufacturers to operate economically.

Most economists expect Europe’s main economies to contract in the coming months, with the severity of the recession dependent on average temperatures, progress in storing natural gas from non-Russian suppliers and the impact of government efforts to help households and industry.

“The darkest cloud on the horizon is clearly in the eurozone,” said Marcelo Carvalho, global head of economics at

BNP Paribas.

Europe’s factories aren’t alone in seeing a surge in costs as a consequence of the war. European households are also facing sharply higher utility bills.

Natural gas, which households use mainly for heating, and power have seen the biggest rises lately, while gasoline prices have eased. That helped push the U.K.’s annual rate of inflation down to 9.9% in July, from 10.1% in June, according to official data out Wednesday.

Despite the rise in energy prices, Europe was one of the global economy’s stronger regions in the first half of this year. Data released Tuesday by the Organization for Economic Cooperation and Development showed the combined gross domestic product of the Group-of-20 largest economies—which account for about 80% of world output—fell in the three months through June. That was largely down to China, where lockdowns to contain the Covid-19 pandemic continue to come with a large economic cost, but the U.S. and India also contracted.

In contrast, the eurozone experienced a pickup in growth and a fall in its unemployment rate to a record low.

That pattern is set to flip as the year draws to a close. The removal of most pandemic restrictions means that southern Europe’s tourism industry had its first normal summer since 2019, which may help the eurozone avoid a contraction in the three months through September.

However, most analysts expect the economy to contract in the final three months of the year and the first quarter of 2023, as energy usage rises because of low temperatures and prices remain high.

“Europe’s energy crisis is all but certain to plunge the continent in a recession,” said Mark Cus Babic, an economist at

Barclays.

The depth of any contraction will depend on how high energy prices go, and whether Europe can avoid energy rationing, which could cause a wave of factory closures.

Economists at the European Central Bank estimate that a complete cutoff of Russian gas supplies could cause eurozone GDP to “decline sharply” in the final quarter of this year and the first quarter of next, contributing to a 0.9% contraction in 2023 as a whole.

However, much depends on natural-gas prices. Some price declines over recent days, as Ukraine’s army has recovered some territory lost to Russia in the early months of the conflict, could point to a slightly smaller fall in output. Natural-gas prices peaked at more than 320 euros a megawatt hour—equivalent to around $319—in late August, but slipped to below 200 euros this week.

“If prices were to settle well below €200 per MWh instead, the European recession could be shallower and the peak in inflation lower than we currently project,” said

Holger Schmieding,

an economist at Berenberg Bank.

So far, Mr. Putin’s economic assault on Europe hasn’t caused voters there to temper their support for Ukraine in its fight against Russia. A Politbarometer poll last week showed 70% of Germans continue to support Ukraine, even if this causes higher energy prices. Only 21% said the West should reduce its support so as to bring energy prices down.

Write to Paul Hannon at [email protected]

Since invading Ukraine, Russian President

Vladimir Putin

has weaponized the country’s vast stores of energy to undermine European support for Kyiv. This month, Russia turned off the taps to a key natural-gas pipeline, Nord Stream. As Wednesday’s data showed, Moscow’s choking of energy supplies to Europe has driven up production costs, making it harder for some manufacturers to operate economically.

Most economists expect Europe’s main economies to contract in the coming months, with the severity of the recession dependent on average temperatures, progress in storing natural gas from non-Russian suppliers and the impact of government efforts to help households and industry.

“The darkest cloud on the horizon is clearly in the eurozone,” said Marcelo Carvalho, global head of economics at

BNP Paribas.

Europe’s factories aren’t alone in seeing a surge in costs as a consequence of the war. European households are also facing sharply higher utility bills.

Natural gas, which households use mainly for heating, and power have seen the biggest rises lately, while gasoline prices have eased. That helped push the U.K.’s annual rate of inflation down to 9.9% in July, from 10.1% in June, according to official data out Wednesday.

Despite the rise in energy prices, Europe was one of the global economy’s stronger regions in the first half of this year. Data released Tuesday by the Organization for Economic Cooperation and Development showed the combined gross domestic product of the Group-of-20 largest economies—which account for about 80% of world output—fell in the three months through June. That was largely down to China, where lockdowns to contain the Covid-19 pandemic continue to come with a large economic cost, but the U.S. and India also contracted.

In contrast, the eurozone experienced a pickup in growth and a fall in its unemployment rate to a record low.

That pattern is set to flip as the year draws to a close. The removal of most pandemic restrictions means that southern Europe’s tourism industry had its first normal summer since 2019, which may help the eurozone avoid a contraction in the three months through September.

However, most analysts expect the economy to contract in the final three months of the year and the first quarter of 2023, as energy usage rises because of low temperatures and prices remain high.

“Europe’s energy crisis is all but certain to plunge the continent in a recession,” said Mark Cus Babic, an economist at

Barclays.

The depth of any contraction will depend on how high energy prices go, and whether Europe can avoid energy rationing, which could cause a wave of factory closures.

Economists at the European Central Bank estimate that a complete cutoff of Russian gas supplies could cause eurozone GDP to “decline sharply” in the final quarter of this year and the first quarter of next, contributing to a 0.9% contraction in 2023 as a whole.

However, much depends on natural-gas prices. Some price declines over recent days, as Ukraine’s army has recovered some territory lost to Russia in the early months of the conflict, could point to a slightly smaller fall in output. Natural-gas prices peaked at more than 320 euros a megawatt hour—equivalent to around $319—in late August, but slipped to below 200 euros this week.

“If prices were to settle well below €200 per MWh instead, the European recession could be shallower and the peak in inflation lower than we currently project,” said

Holger Schmieding,

an economist at Berenberg Bank.

So far, Mr. Putin’s economic assault on Europe hasn’t caused voters there to temper their support for Ukraine in its fight against Russia. A Politbarometer poll last week showed 70% of Germans continue to support Ukraine, even if this causes higher energy prices. Only 21% said the West should reduce its support so as to bring energy prices down.

Write to Paul Hannon at [email protected]