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INDUSTRIAL production in Europe has been affected by the lack of natural gas supply from Russia. According to information from the European Union, industrial production fell 2.3% in July due to the energy cuts suffered by the manufacturing sector as a result of the energy crisis.
In March, with the start of the Russian invasion of Ukraine, European industrial production fell slightly but then recovered again during the following months. However, this appears to be about to change.
Since the beginning of the war, Russian President Vladimir Putin has used European dependence on Russian gas and oil as weapons of extortion to force the European Union to withdraw its support for Ukraine.
Since June the main pipeline connecting Russia to Europe, Nord Stream 1, has been operating at 20% of its capacity. By August, the Russian state-owned gas company that operates Nord Stream, Gazprom, announced that it would take the pipeline out of operation for maintenance operations for an indefinite term.
Although Europe has increased its gas reserves in the face of Russia’s threats, some countries will have to significantly reduce their energy consumption to avoid depleting those reserves. Germany, one of the countries most affected by the Russian restrictions, would have to cut its natural gas consumption by 20% to avoid depleting its reserves before the end of the winter.
Most forecasters expect European economies to contract due to gas supply cuts in the coming months. The strength of that contraction will depend largely on the severity of the coming winter.
While productive activity will be affected, households in Europe will bear the brunt. European citizens are seeing disproportionately high utility bills and some of the lowest income households are beginning to cut back on spending to cope with the situation.
The decline in gasoline prices has helped to partially relieve the inflationary pressure facing the old continent. However, the price of natural gas continues to rise.
Despite rising energy prices, during the first half of 2022, Europe was the best economic performer in the developed world. While the United States entered a technical recession and economic activity slowed in China due to restrictions imposed to control Covid-19, in Europe economic activity grew by 4.2% for the second half of 2022.
The southern region, which is less dependent on Russian gas imports and has a milder climate in winter, could partially reduce the economic impact of the restrictions.
The depth of an economic contraction in Europe will depend on how high winter energy prices become and on whether energy rationing will necessarily force factories to close, affecting economic activity.
The European Central Bank expects the European economy to see a downturn during the last quarter of 2022 as a result of Russian gas restrictions. This downturn would extend into the first quarter of 2023. According to ECB forecasts, economic activity in Europe will fall by 0.9% in 2023.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica