The Czech National Bank (CNB) kept the policy rate unchanged at 7% for the fourth consecutive meeting today, in line with our and consensus forecast.
Gas Consumption
German industry has been successful in reducing its consumption of gas relative to previous years, particularly in the second half of the year.
Following the loss of Russian pipeline gas, European countries have increasingly focused on LNG shipments as a replacement, giving Europe a safety buffer this winter.
Better fundamentals and fewer operational setbacks should lower gross gas use by the EU’s power sector by 200TWh (5% of total gas consumption) next year, enhancing the bloc’s energy security. Renewables and nuclear should drive the supply side improvement, but risks remain.
A remarkably consistent fact of energy usage across economies, industries, and energy types is that intensity has come down steeply in recent decades. In other words, the amount of energy required to conduct a given amount of economic activity has fallen.
Russia’s shutdown of natural gas flows to Europe has resulted in skyrocketing regional prices. This has contributed to a significant downgrade of our global and national economic growth forecasts and will impact European industry negatively.
According to the proposal of the German government’s expert commission around half of the recently agreed €200bn fiscal package or about 2.5% of GDP could be used for a gas price break for households and industry.
Although easing restrictions in China have helped to reduce global supply chain pressures, we expect rising costs and weakening demand to weigh on global supply chains for the second half of this year and into 2023.
The energy crisis took a dramatic turn this week after reports of several leaks in the gas pipelines Nordstream 1 and 2 were reported. The nature of the incidents makes it very likely that sabotage was the cause, although the country responsible or the motive is unknown.
Russia’s invasion of Ukraine continues to sow economic disruption around the world. One long-term problem the conflict could exacerbate is climate change, as Europe slows its transition from fossil fuels in the scramble for alternatives to Russian energy—though the grim events of 2022 could yet end up accelerating a greener future.
A cold winter in Europe would require drastic cuts in gas consumption – consistent with hard rationing – in Germany and Italy. We assume gas supplies will be down by 20% y/y in peak season (October-March) due to the inability to fully compensate for the stop to Russian pipeline gas flows.
Recession risks are mounting globally, including in the eurozone. Growing recession fears have resulted in large drops in oil prices and in further strengthening of the US dollar. Our tentative look at the eurozone shows the economy is slowing and that the risk of a recession is real.
