Higher gas prices to make for a grim winter in Europe
We will increase gas prices and inflation and cut GDP growth in the September forecast round, with the eurozone economy contracting around 1% from peak to trough this winter. The EU’s aim to lower gas consumption by 15% is doable and should be enough to avoid “hard” rationing, as “soft” rationing in some members, notably Germany, has already led to much lower gas demand. Higher gas and electricity prices, not physical gas shortages, present the key downside risk.
Higher gas prices to make for a grim winter in Europe
We will increase gas prices and inflation and cut GDP growth in the September forecast round, with the eurozone economy contracting around 1% from peak to trough this winter. The EU’s aim to lower gas consumption by 15% is doable and should be enough to avoid “hard” rationing, as “soft” rationing in some members, notably Germany, has already led to much lower gas demand. Higher gas and electricity prices, not physical gas shortages, present the key downside risk.
We have cut our 2023 GDP growth forecast for Finland by 0.3ppts to 0.5%. Although growth in Q2 remained resilient based on the flash estimate, pushing up our forecast for 2022 to 2.2%, the near-term outlook remains dominated by headwinds. High inflation is increasingly passing through to core prices, squeezing real incomes and denting confidence.
Despite a better start to 2022 than previously estimated, we have kept our forecast for this year unchanged due to downward revisions in H2 2022. Downside risks to activity are mounting, with high inflation increasingly passing through to core prices, squeezing real incomes and denting confidence. Meanwhile, energy prices remain elevated, and gas rationing in Europe this winter is increasingly likely.
We now see gas rationing this winter in European economies most reliant on Russia as very likely. Our modelling finds that cutting final gas demand in Q4 by 10% via rationing with governments shielding households would mean severe contractions in industry and a direct loss of annual gross value-added from 1.5% to 4%. GVA losses would roughly double if gas rationing extends to Q1 2023. 
The eurozone’s labour market has outperformed expectations since the start of the pandemic, but current headwinds to economic growth are mounting and will adversely impact employment into 2023. A mix of domestic reopening tailwinds and looser travel restrictions will support employment growth in the first half of 2022 and helps underpin our GDP forecast for this year.
The ground has shifted and cheap budget funding in frontier markets is a thing of the past. In the current climate, African nations will struggle with a narrowing investor pool amid escalating inflation and FX risks. While forced consolidation due to a funding shortfall is a viable risk, a number of funding avenues can still be explored. We believe that these encompass a greater embracing of concessional funding options, preferably underpinned by an IMF or World Bank initiative. Environmental, social & governance (ESG) bonds also offer competitive pricing while supporting governance and accountability.
We have increased our 2022 GDP growth forecast for Finland to 1.8% from 1.5% last month, due to a stronger-than-expected Q1. However, downside risks to activity dominate, with high inflation increasingly passing through to core prices, squeezing real incomes and denting consumption. 
The global economic environment has shifted with international price inflation surging, monetary conditions being aggressively tightened, and a number of commodity prices changing trajectory. The resilience to shocks such as these varies between countries, and the actual impact that the shocks of 2022 will have on each country differs. We find favourable combinations of resilience and shelter from these shocks in Botswana, South Africa, Côte d’Ivoire and Angola. In turn, the outlook has turned decidedly negative for Ethiopia, Tunisia, Egypt and Kenya.
Along with energy prices, global food prices have emerged as a key driver of the eurozone’s current inflationary surge. Like other advanced economies, eurozone countries tend to be less exposed to global food price fluctuations. But if persistent and combined with strong demand, high food prices could result in a higher pass-through to core inflation.
