Europe's gas crisis means its chance of recession is twice as high as for the US, Goldman Sachs warns

  • There’s a 60% chance that Europe will slip into recession within 12 months, according to Goldman Sachs.
  • The continent is suffering an energy crisis with Russia choking off key gas supplies.
  • That’s fuelling inflation – making an economic downturn much more likely, strategists said.

Goldman Sachs strategists believe Europe’s chances of a recession are now twice as high as those of the US, as a growing energy crisis risks plunging the continent into economic downturn.

Surging commodity costs are likely to keep inflation higher for longer and increase recession risk, according to the bank.

“The arguments for why the next recession is more likely to be severe in Europe are similar to the arguments for a higher risk of any recession,” a team of strategists led by Goldman Sachs’s chief economist Jan Hatzius said. “Our subjective probability that the economy enters a recession in the next 12 months is the highest in the Euro area (60%) and the UK (35%), followed by the US (30%).”

Western sanctions against Russia after Vladimir Putin invaded Ukraine in February have caused European commodity prices to soar.

The continent was heavily reliant on Russian oil imports before war broke out but has had to turn to other sources of crude since February. The Brent and WTI oil benchmarks currently trade at over $85 a barrel – a 27% premium to Russian Urals crude, which is currently priced at just over $67 a barrel.

Russia has also choked off the continent’s natural gas supplies, slashing the capacity of the Nord Stream 1 pipeline to 20% and suspending exports through the southern leg of the Druzhba pipeline, which supplied gas to the Czech Republic, Hungary, and Slovakia.

Dutch TTF natural gas futures now trade at 231 euros ($235) per megawatt hour – meaning that they’ve risen a staggering 176% since the start of June. US natural gas futures, by contrast, trade at $9.36 per MMBtu, which equates to around $31.50 per megawatt hour.

Goldman Sachs said the commodity crunch will likely mean that prices continue to soar in both the euro area and the UK. Eurozone inflation hit a record high of 8.9% in July, while UK data on Wednesday showed inflation hit 10.1% last month. 

“The contribution from energy to inflation is much larger and more back-loaded in the euro area and especially the UK than in the US,” Hatzius’s team said. “This implies a worse central outlook for real income, consumer spending, and industrial activity in Europe.”

“Larger gas supply disruptions, energy prices increases, or second-round effects via supply chains and confidence channels could make the Euro area recession deeper,” they added.

Read more: This map shows where Europe gets its natural gas – and why economic disaster is looming if Russia cuts off its fuel supply

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