Soaring energy prices weigh on the European economy

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Soaring energy prices are putting pressure on European consumers desperate for relief after two years of coronavirus, lockdowns and employment worries.

Financial woes are weighing heavily on households, who are more concerned about prices than at any time in this century, and feel less inclined to splurge, according to a European Commission survey. If demand suffers, it has implications for how quickly the economy can fully recover from the destruction caused by the pandemic.

Wholesale gas prices have risen nearly 300% in the past year due to unusually low storage levels, increased demand from economies emerging from the pandemic, and capped flows from Russia.

This has caused inflation to rise, and Bank of America says the economy “has come under pressure from the squeeze in the purchasing power of consumers.” He estimates that household energy costs will increase by 50% this year, and government assistance to protect households will only offset about a quarter of that.

A Bloomberg Economics model estimates that the energy crisis could reduce gross domestic product by up to 1%. The impact will vary from country to country, and government support could mean less extreme fallout.

Read more: EURO ZONE OVERVIEW: What the energy crisis means for growth

“These are significant sums, especially for the poorest households,” says Georg Zachmann, energy market specialist at Bruegel. “If you take this money out of the pockets of the poorest households, it will have an effect on consumption. “

Banque Pictet & Cie estimates that the surge in energy prices could cut growth by 0.2 percentage point this quarter. There is also an impact if it forces energy-intensive companies to cut back on production. The World Bank on Tuesday warned that a prolonged crisis “would present a significant downside risk to the eurozone’s short-term outlook.”

Economists at UBS AG this week cut their forecast for the region’s expansion in 2022 to 4.2% from 4.8% due to omicron and new restrictions. They also see a downside risk from a further rise in energy prices.

But the economic impact may be limited as consumers still accumulated a large amount of savings during the pandemic and the job market appears strong, which should support wages.

“It will be a problem for low income households. Here, the squeeze due to rising energy prices is clear, ”said Reinhard Cluse at UBS. “For the household sector as a whole, forced savings will help digest it.”

So far, the crisis has been particularly felt in Eastern Europe, which is home to the top 10 countries in terms of consumer spending absorbed by energy bills.

In Poland, miners at Europe’s largest coal producer blocked fuel from reaching power plants for two days last week due to unpaid overtime they put in to meet the rising demand. asks last year. They are also asking for increases, to help them effectively pay the energy bills they produce.

Inflation in Poland is 8.6%, the highest for more than two decades. In the euro zone, it is at 5%, a record for the region, Estonia and Lithuania experiencing double-digit rates.

While inflation is expected to slow this year, that will not ease the pain. The arguments of central bankers about a “transient” peak do not change the fact that prices are rising and the burden on consumers is increasing month by month.

There has been some bearish news recently, with European natural gas futures falling this week. But prices have been roller-coastered, and an explosion of cold or heightened tension between Europe and Russia could change direction again.

“In the short term, we do not believe that rising energy prices will threaten euro area growth, as governments have taken swift countermeasures,” said Nadia Gharbi, economist at Pictet in Geneva. But a sustained increase “could jeopardize economic growth”, especially if governments withdraw their support, she said.

In the UK, where two dozen home energy providers have collapsed, the crisis month will be April. This is when the new cap designed to limit price increases comes into effect. It is expected to jump 50% to almost 2,000 pounds ($ 2,725).

“Expensive prohibitive”

Europe’s total primary energy bill will rise to around $ 1 trillion, according to Citigroup Inc. Yet, while previous peaks were largely due to soaring oil prices, it is this time from the cost of heating and powering everything from homes to transportation to large industrial plants. .

“It is gas and electricity that are becoming prohibitive in Europe,” wrote Citi analysts, including Alastair Syme. “Consumers and industry in the region are likely to have to make tough choices about their energy use. “

Meanwhile, cost pressure is driving some to take drastic action.

Palettes53, a family-owned pallet maker near Le Mans in northwestern France, has decided to stop using nuclear power and switch to a diesel generator.

Yannick Chopin, who runs the company, says it’s his only option, even though he will need a lot of diesel. Sticking to the electricity grid would increase energy costs five-fold, up to 50% of total costs.

“If we didn’t act immediately, we would have cash flow problems,” Chopin said. “We have gone through several crises, such as the 2008 financial crisis. It is this crisis that worries us the most.

The constraints on businesses also have implications for consumers if businesses have to charge more to protect their profits. Portuguese paper producer Navigator has said it will increase the price of fabrics by 15% due to rising energy, logistics and raw material costs. Furniture retailer Ikea is raising prices on average 9% in its markets, for similar reasons.

In the Czech Republic, soaring energy costs – exacerbated by the collapse of 14 small energy providers during the natural gas price spike in the fall – added to the pressure on Charita Litomerice, who manages a retirement home for 33 patients with Alzheimer’s disease.

Karolina Wankowska, the head of the charity, said they had already had to reduce the amount and quality of the food they gave residents in the later stages of their lives.

“We are in a really difficult situation,” she said. “After Covid, which has also increased our costs, we are facing unprecedented inflation and energy prices, and our suppliers are raising their prices.”

Read more:

  • Central Banks, Not Covid, Will Lead Global Economies in 2022

  • Europe faces $ 1 trillion energy bill this year, says Citigroup

  • UK gives itself three months to find solution to rising energy prices

(Updates with Citi in 18th paragraph)

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