- Goldman Sachs says Europe’s natural gas crunch will spill over and weigh on the US economy.
- If natural gas flows from Russia stay at their current low levels, US trade with Europe will slow relatively sharply, the bank said.
- Goldman said the hit to the US would be “a meaningful headwind at a time when growth is already running below potential.”
The impact of Europe’s natural gas shortages will spill over into the already slowing US economy by hitting cross-Atlantic trade, according to Goldman Sachs.
The investment bank said Europe’s economy is set to slow sharply, with Germany expected to tumble into a recession, as energy shortages weigh on growth. Goldman’s economists, led by Spencer Hill, said US exports to Europe will likely suffer.
In a situation where Russian natural gas supplies remain at currently constrained levels, US exports could fall 4% in the first quarter of 2023, having risen 9% year-on-year last quarter.
The drop would likely lower annualized US economic growth by around a quarter of a percentage point in each of the next three quarters. Goldman called this a “a meaningful headwind at a time when growth is already running below potential.”
Goldman also said the natural gas shortages in Europe could further stoke inflation in the US, by causing production shortages on the continent and pushing up the prices of goods on global markets.
Russia has cut its natural gas exports to Europe, blaming sanctions for blocking the export of a key piece of equipment from Canada. Fears are growing that Russia could make the roughly 60% reduction permanent, or even halt supplies altogether, due to tensions over the Ukraine conflict.
The supply crunch has added to the dramatic surge in European natural gas prices, which have shot up more than 600% over the last year, piling the pressure on the continent’s already weak economy.
Goldman now expects Germany, Europe’s biggest economy, to fall into a recession, with negative consequences for the US.
“Exports to Europe represent 28% of US exports and just over 3% of US GDP,” Goldman said. “We find that exports to Europe are particularly sensitive to the pace of growth in Germany — probably because of its relatively open and manufacturing-oriented economy.”
The analysts added: “Accordingly, the German economic underperformance that our European team expects argues for relatively larger spillovers.”
Goldman said in June that it does not expect the US to fall into a recession, even as the Federal Reserve hikes interest rates hard.
However, it has said the risks are growing. The bank’s CEO David Solomon said there is a high chance the US enters a recession in the next 24 months, in an interview with NPR released Monday.