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Russia's retreat in Ukraine won't save Europe from recession this winter

Russia's retreat in Ukraine won't save Europe from recession this winter



Map explainer: How Ukraine pulled off counteroffensive in the eastReplayMore Videos ... (16 Videos)Map shows how Ukraine pulled off counteroffensive'Both a warning and a threat': Economics professor decodes Fed chair's commentsFed chair lays out the 'unfortunate costs of reducing inflation'Biden's student loan forgiveness plan: Who it helps, who it doesn'tMiddle class Black Americans react to economy under BidenEngineer says she 'quiet quit' her job. Hear what that meansFed official on recession talk: When we look at the data, I feel relievedInflation is cooling but prices are still painfully high'It didn't get worse': Romans breaks down key inflation dataOnline shopping prices are starting to ease. Here's why that's significantHere's how the Inflation Reduction Act could affect you'Jaw-dropping number:' Ex Obama economic adviser on the jobs reportJuly jobs report doubles expectationsWhat is a recession?'I don't want to go bankrupt': High inflation leaves little room for unexpected costsFood bank demand skyrockets as cash-strapped Americans seek help over inflationLondon (CNN Business)Ukrainian troops have launched a stunning offensive in recent days, recapturing roughly 2,300 square miles of their country's territory with a speed that could force Russian President Vladimir Putin to reconsider his strategy and objectives in the six-month-old war.

Yet even if the conflict continues to swing in Ukraine's favor, Europe is unlikely to dodge a recession this winter, given the energy crisis triggered by February's invasion."I don't think it's likely [that] suddenly Ukraine pushes back Russian forces, the war ends, Russian gas flows to Europe resume [and] prices come down," said Neil Shearing, group chief economist at Capital Economics. "That's just not going to happen."Natural gas futures in Europe have dropped almost 50% after hitting a new record in late August. They fell 20% last week alone as Ukraine's troops advanced. But they're still about 460% higher than a year ago, following Russia's announcement that it would shut the crucial Nord Stream 1 pipeline. It's also not clear what Putin's next moves will be as his forces retreat. He could cut remaining supplies of gas to Europe that continue to flow through Ukraine, worsening the region's energy crisis, or revert to even more worrying forms of brinkmanship if he believes he's been backed into a corner.Read More"We should have some humility about our ability to predict what will happen," Shearing said.Europe has been racing to stockpile energy supplies so households and businesses can retain access to power and heat as the weather gets colder. The endeavor has been successful so far, with storage facilities at 84% of capacity, though at a huge cost. Governments have also rolled out generous support packages to try to shield consumers and small companies from the effects of surging prices. The United Kingdom and Germany, along with other EU countries, have announced more than €500 billion ($509 billion) in subsidies for bills and other interventions aimed at softening the impact.Even so, a contraction in economic activity in the coming months looks inevitable, economists warn. Output in the United Kingdom stagnated in the three months to July, according to data released Monday. Meanwhile, Germany's Ifo Institute has slashed its estimate for growth in Europe's biggest economy."We are heading into a winter recession," Timo Wollmershäuser, the institute's head of forecasts, said Monday.Most forecasters think Europe's economy will contract in the last three months of 2022 and the first three months of 2023. What happens after that remains uncertain.It comes down to gasEurope's reliance on natural gas from Russia, while diminished this year, has left it vulnerable as the market experiences unprecedented volatility.Russia is now supplying 78% less gas to the region compared to this time last year, according to Kaushal Ramesh, head of gas analytics at Rystad Energy.Prices have surged as a result, as European buyers have scoured the world for alternative supplies. And the skyrocketing cost of energy has dramatically changed the economic outlook, pushing up household bills and forcing people to pull back other spending, while forcing heavy industry to shutter factories."The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus," Wollmershäuser said. "We don't expect a return to normal until 2024."The closely watched ZEW indicator of economic sentiment in Germany fell again in September, according to data released Tuesday, a sign that expectations for the economy look increasingly bleak."The outlook for the next six months has deteriorated further," ZEW President Achim Wambach said. "The prospect of energy shortages in winter has made expectations even more negative for large parts of German industry." An economic slowdown in China is also bad news, he added. A real estate crisis and ongoing coronavirus restrictions there could weigh on German exports.Carsten Brzeski, global head of macro research for ING, said the success of Ukraine's counteroffensive "shows that there is still a small likelihood for a positive scenario in this ocean of negative economic outlooks." Still, he warned that it's "hard to see any scenario in which energy prices would come down significantly in the coming months."Ramesh of Rystad Energy sees huge risks that pressure on gas prices could return. They've come down over the past week on hopes that the European Union could shortly announce a robust market intervention. But fundamental concerns about supply and demand have not changed, and lower liquidity in the market means big price swings are possible in either direction."We're not heading toward a bottom for prices," Ramesh said. "There's plenty of upside, if you ask me."What happens nextMuch hinges on how cold it gets over the winter months. If temperatures plunge, and demand for energy shoots up, driving up prices, economic conditions could deteriorate sharply.Government action is expected to soften the blow. The United Kingdom has pledged that the typical UK household will pay no more than £2,500 ($2,932) for their energy for the next two years. It will also support businesses, charities and public sector organizations with their energy costs for the next six months, and possibly longer. Germany recently announced a €65 billion ($66 billion) package to help households and businesses meet their energy costs. But most economists think the energy problem is so massive that even hundreds of billions of dollars in aid won't be enough to skirt a downturn. It's also not yet clear what proportion of the commitments made will ultimately be implemented."The fiscal support diminishes the severity of a recession but doesn't stave it off entirely," Shearing of Capital Economics said.As high energy prices fan inflation, it also adds to pressure on the European Central Bank, which last week raised its key interest rate by an unprecedented magnitude, while indicating that more hikes are on the horizon. Rising borrowing costs will serve as another drag on Europe's economy. The Bank of England is also aggressively hiking rates, walking a thin line after forecasting in August that the United Kingdom will enter a recession by the end of this year.Yet their options are limited as central banks work to contain the run-up in prices. The ECB now expects inflation to average 8.1% this year and 5.5% in 2023. The Bank of England last predicted that inflation in the United Kingdom will peak at more than 13%, though that estimate could be revised lower as government assistance is rolled out.


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