Fitch Warns: Gas Could Ignite Eurozone Recession

Any sudden interruption in Russian gas supplies to the EU member states could push the Eurozone into recession, Fitch Ratings states that exposures are “so large that an immediate and total cessation of Russian natural gas supplies would result in gas shortages and rationing, causing a major macroeconomic shock”.

The European countries do depend on imports to supply net 84% of its domestic gas requirements. With 38% of EU’s gas imports from Russia. Therefore, Fitch estimates that around 30% of domestic gas consumption in the EU and the Eurozone is supplied by Russia. For Germany, the natural gas quantity is double at the 60% level.

The potential impact of a loss in Russian gas supply on GDP through supply-chain connections can be calculated by combining these exposures with recent estimates from the ECB of the effect of a 10% reduction in gas supplies on Eurozone value added. The ECB’s estimates depend on a national accounts framework and suggest Eurozone GDP would fall by 0.7% if gas supply declines by 10%. A 30% loss of gas supply would therefore translate into a 2% decline in Eurozone GDP. For Germany, the loss of Russian gas supply would imply a GDP fall of close to 4%.

Over the passage of time, it could be logical to substitute lost Russian supplies with other sources of energy. But any sudden loss of Russian oil and gas imports constitute a highly potential risk that is significant and rising as the Ukraine war continues. It could be impossible to replace fully in the near term. The surge in energy prices all over the globe, in such a scenario does add to inflationary pressures and pressure real incomes.