Europe’s economies showed resilience in May but remain vulnerable and could suffer a steep downturn should Russia stop supplying natural gas to the region.
Economic data released Wednesday showed output at factories across the eurozone jumped in May, while the U.K. economy rebounded from a contraction in April.
However, the rise in eurozone factory output was almost entirely down to U.S. businesses that operate in Ireland, while U.K. growth was partly driven by the lifting of two years of restricted access to local health services.
Both the U.K. and eurozone economies grew in the first three months of the year, in contrast with the U.S., which experienced a contraction. However, the surge in home energy prices that followed Russia’s invasion of Ukraine has significantly slowed the recovery from the pandemic, as households cut back on other goods and services.
“It’s barely enough to pay the bills,” said Arthur Hodson, a sports instructor from Liverpool, northwestern England. “The main things you have to pay for are a roof over your head, gas, water and food. Everything after that is a luxury.”
Figures released by the European Union’s statistics agency Wednesday showed industrial output was 0.8% higher in May than in April. However, output fell in France, Italy and Spain and was only slightly higher in Germany. By contrast, Irish output surged 13.9%, driven by a rise in output from U.S. factories based in the country, which accounts for 5.1% of the eurozone’s total industrial production.
Without Ireland, eurozone output was stagnant. Economists expect that stagnation would quickly turn to decline if Russia’s supplies of natural gas to Europe weren’t to resume after scheduled maintenance that shut down the Nord Stream pipeline on Monday. Germany’s central bank estimates that a halt to supplies that required some rationing would lead to a 3.25% drop in economic activity in the eurozone’s largest economy from the third quarter of this year through the second quarter of 2023.
Some other estimates see a larger cost depending on the scale of the shortfall for factories. In a recent joint study, Germany’s leading economic institutes forecast a decline of as much as 9.9% or as little as 1.6% depending on the extent of the hypothetical gas shortfall.
One key question is how successful efforts to reduce household consumption might be, and the institutes urged the government to allow home gas bills to rise in line with world market prices to discourage home consumption. But while home energy usage is low during the summer months, with few homes operating air conditioning, there would be a pressing need to give priority to households during the winter.
According to JPMorgan, 36% of natural gas consumed in Germany during 2021 was used by factories, while 31% was used by households. Around half of that natural gas came from Russia, although the share fell to about 35% in the first four months of the year.
The timing of the impact on German factories is also uncertain, although it could come as soon as July 22, when Nord Stream’s maintenance is due to be completed.
“Even if gas flows ultimately resume, a failure to resume the flows immediately after maintenance work is complete would already trigger a policy response in Germany, with some precautionary rationing,” economists at JPMorgan wrote in a note to clients.
While the most consequential economic impact of a halt to gas supplies would be felt in Germany, most of Europe would suffer from energy shortages and higher prices. If it were immediate, economists at UBS estimate that annual eurozone economic output would fall 8.3% in the three months through September and 7% in the three months through December, followed by a 0.9% drop in the first quarter of next year and a return to growth thereafter.
While the U.K. gets a tiny share of its gas from Russia, higher prices across Europe would likely add to the headwinds that have already slowed the economy. Figures released Wednesday by the U.K.’s Office for National Statistics showed gross domestic product—a broad measure of the goods and services produced in a country—was 0.5% higher in May than in April.
However, that partly reflected the reopening of a large part of the state-run health service. By contrast, the ONS said the output of six of 12 consumer-services industries fell during the month, with sports and recreation seeing the largest decline.
A sharp rise in home energy prices in April is likely to prove to be a sustained drag on growth, particularly since energy suppliers expect to raise prices by a similar percentage in October, when the cap on charges is next changed.
The British Retail Consortium, a group of leading store operators, Tuesday said sales were lower in June than a year earlier.
“Sales volumes are falling to a rate not seen since the depths of the pandemic, as inflation continues to bite, and households cut back spending,” said
the BRC’s chief executive. “Discretionary purchases were hit hard, especially white goods and homeware.”
—Elissa Miolene contributed to this article.
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