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How big is the threat of an end to Russian gas exports?

An end to Russian gas exports to Europe would prompt us to forecast a deeper recession in the euro-zone this winter than we currently anticipate. The hit would come partly through higher inflation, which would further squeeze real incomes, and partly through gas rationing, which would particularly affect industry. As an illustrative scenario we think the combined effect would reduce annual GDP by around 2% in the euro-zone next year relative to our current forecast.
  • An end to Russian gas exports to Europe would prompt us to forecast a deeper recession in the euro-zone this winter than we currently anticipate. The hit would come partly through higher inflation, which would further squeeze real incomes, and partly through gas rationing, which would particularly affect industry. As an illustrative scenario we think the combined effect would reduce annual GDP by around 2% in the euro-zone next year relative to our current forecast.
  • The surge in natural gas prices since early 2021 has already dealt a heavy blow to the euro-zone. Wholesale natural gas prices in Europe are more than ten times their pre-pandemic average and have contributed to a 50% rise in household energy prices over the past eighteen months, denting household real incomes and threatening to cause a recession.
  • Russia’s decision to cut the flow of gas through Nord Stream 1 to only a fifth of its capacity will make it harder for Europe to fill its gas storage facilities before the winter, increasing the risk that some countries run out of gas. What’s more, Russia could at any moment turn off the gas taps completely.
  • It is highly uncertain how high gas prices would go in that scenario, but it’s plausible that they would double, to around €400/MWh. After allowing for knock-on effects on other sectors this would increase inflation by around two percentage points next year to an average of 6%, rather than 4% as we currently forecast. That alone would cut GDP in 2023 by around 1% through reducing household consumption.
  • There would also be a risk of gas rationing if Russia ended all its gas exports to Europe. Among the larger economies Germany and Italy would be at greatest risk, though whether rationing were needed would depend on various factors including the scale-up of alternative energy sources, the extent of household and industrial demand reduction, and the severity of the winter.
  • If Germany were forced into rationing it would probably concentrate cuts on industries such as chemicals and metals which use huge quantities of gas. The major gas-consuming sectors account for 3-4% of value added in the German economy so as an illustrative scenario, if output in these sectors were cut by 50% (which seems plausible), this would directly reduce German GDP by around 2% while rationing was in place. Supply-chain effects and reduced business confidence may double these costs, leaving German GDP around 4% lower than it would otherwise be.
  • However, an acute shortage of gas would (hopefully) last for only a few months. That’s because the demand for gas is highly seasonal, falling by more than 50% during the summer, and the supply of energy from other sources – notably LNG – should increase next year as new infrastructure comes on-stream.
  • The hit to aggregate euro-zone activity might be around half the impact on Germany. So in our illustrative case, a complete end to Russian gas exports would cut euro-zone GDP by around 2% whilst rationing was in place in addition to the 1ppt cut due to higher inflation. All told, annual euro-zone GDP would contract by around 1.5% next year rather than expanding by 0.5% as we are currently forecasting.
  • While a gas embargo would deliver another blow to euro-zone GDP it would not stop the ECB from tightening policy. Underlying inflation is well above the ECB’s target and the labour market is exceptionally tight. That said, if the recession turns out to be as deep as in our adverse scenario, the Bank may end its hiking cycle before rates reach the 2% peak that we currently envisage.

How big is the threat of an end to Russian gas exports?

Europe’s energy crisis is already imposing a huge cost on the euro-zone economy and things would get worse in the winter if Russia stops selling any gas to Europe. In this Focus we consider how an end to Russian gas exports would affect the euro-zone. We focus primarily on the next year or so as that is when the supply problem will be most acute. And we look particularly at Germany because it is the most vulnerable of the larger economies.

The impact of the gas price surge

European natural gas prices shot up in late 2021 and have accelerated since Russia’s invasion of Ukraine. Prices have averaged €110/MWh so far this year and are now close to €200/MWh. (See Chart 1.) Astonishingly, this is more than ten times their average in the decade to 2020.

Chart 1: Europe Natural Gas (TTF, € Per MWh)

Source: Refinitiv

The gas market has an outsized impact on overall energy prices because it is the key driver of electricity prices. The latest data show that gas and electricity inflation was 39% in the euro-zone in June, although it varied between 70% in Italy and just 20% in France, reflecting different market structures and government policies. (See Chart 2.)

This energy price shock and its impact on real household incomes is a key reason we are forecasting that the euro-zone will enter a recession later this year, as we explained in our latest Outlook.

The index of energy prices in the euro-zone (HICP Energy), which includes the prices of liquid fuels used in vehicles as well as gas and electricity, has risen nearly 50% from its 2019 level as all components of energy prices increased by similar amounts. And given the weight of energy in the HICP (11%), this is sufficient to push the aggregate price level up by 5ppts which, other things equal, reduces real household incomes by the same amount.

Chart 2: HICP Electricity & Gas (% y/y)

Source: Refinitiv

Russian gas supply reduced

Russia has reduced the supply of gas to Europe in several steps over the past few months:

  • In March Russia passed a decree demanding that “unfriendly” governments should pay for gas in rubles through a special account with Gazprombank.
  • In April Russia cut off its supply of gas to Poland and Bulgaria.
  • Over the past two months, it reduced the volume of gas flowing through Nord Stream 1 to 40% of capacity and then just 20%. (See Chart 3.) Nord Stream typically pumps nearly half of Russia’s gas exports to the EU and is by far the most important route for gas imports to Germany.

Chart 3: Russia Natural Gas Exports to Europe
(Index, Jan. 2021 = 100)

Source: Refinitiv

In what follows we look at the scope for Europe to increase its supply or reduce demand for gas, and then consider how Germany in particular would implement any cuts if forced into rationing.

Scope to increase supply

In principle, there is scope for Europe to increase imports from other pipelines – from Norway, North Africa and Azerbaijan – or in the form of liquified natural gas (LNG). (See Chart 4.)

Chart 4: Sources of European Natural Gas (Billion Cubic Metres, 2021)

Sources: Various

In response to Russia’s moves, Europe has increased its imports of energy from other sources. (See Chart 5.) There is a limit to its capacity to increase LNG imports, turn it back into a usable form (a process called regasification) and transport it around the continent, but this capacity is set to increase. Germany and Italy have ordered new floating storage and regasification units which are expected to come into service over the coming year or so.

Chart 5: Mainland Europe Gas Imports (Thousand GWh per Day)

Sources: Refinitiv, Capital Economics

Several countries have also announced plans to expand their use of coal and nuclear power to ease pressure on gas as a fuel for electricity generation. Germany has already said it will continue using coal-fired power stations for longer than previously planned and the government is also considering extending the life of at least one of its three nuclear power stations.

Scope to reduce demand

Meanwhile, Europe’s demand for gas is set to decline this year.

There will be some “demand destruction” as high gas prices prompt businesses and households to cut their consumption. Several aluminium and zinc smelters have already scaled back their activity, Europe’s largest steel producer has cut electricity use during peak times, and in Germany output of ammonia fell by 40% in Q3 2021 due to surging gas prices (though it subsequently rebounded).

Studies generally find that the elasticity of demand for gas is very low so any reduction in demand will be quite small. (See here for example.) But these estimates are based on historical data at a time when prices were much lower and they may underestimate the responsiveness of gas demand to extreme price movements.

One recent study suggests that demand for gas has already fallen significantly. After controlling for variables such as the weather and power generation from fuels other than gas, the authors found that industrial demand was 11% down since August 2021 and household demand was 6% down since March 2022. This suggests that high prices may play a big role in bringing demand down.

On top of the impact of higher prices, governments have now begun to encourage households and businesses to reduce their energy consumption.

So far these information campaigns have been fairly low-key. Politicians such as German Vice Chancellor Robert Habeck have set an example by having shorter showers and have encouraged others to follow suit, but this is on nothing like the scale of public health campaigns during the pandemic. Things could become much more serious if the situation becomes more acute. (One parallel is with hosepipe bans which are frequently imposed in the UK and which research suggests reduce water use by up to 10%. Another is with the information campaigns in Japan after the Fukushima earthquake – see Box 1.)

Aside from national policies, the EU has agreed a European Gas Demand Reduction Plan according to which member states will reduce consumption by 15% between August this year and March next year. So far this agreement is voluntary and the EC has not been given authority to decide that it should become mandatory. Moreover, the mechanisms for reducing demand have not been specified, and there is a long list of exemptions. So it is unclear how much difference this will make.

All told, there is scope for demand reduction to help to avert or limit a gas shortage in the coming winter, but exactly how this will play out remains uncertain.

Gas rationing likely, but not inevitable

Table 1, which shows estimates by the European Commission, International Energy Agency and IMF of how a shortfall in the supply of gas from Russia could be made up, underlines how uncertain the outlook is. For example, estimates of the likely increase in LNG imports vary from 20 to 50bcm and there is also a big range of estimates of the scope for demand compression.

Table 1: European Union Scope to Replace Russian Gas over 12 Months (Billion cubic metres)




IMF (22)

IMF (22-23)

Energy Supply




















Solar etc.

























Shortfall as Percent of Russian imports





Source: IMF Working Paper 22/145

On top of these uncertainties, the weather is also a big unknown, as is the degree to which European countries will cooperate to help to reduce the risk that countries run out of gas.

While there is no objective way to calculate the probability that Europe is forced into some gas rationing, we still think it is a downside risk to our forecasts rather than a base case.

Germany is the biggest concern

Before turning to the question of how much gas rationing would affect economic activity it’s worth noting that some countries are at greater risk than others. Chart 6 shows that Russian gas accounts for a bigger proportion of energy use for Austria, the Netherlands, Italy and Germany than for other euro-zone countries, including France and Spain.

Chart 6: Russian Gas as a Share of Total Energy Consumption (2020, %)

Source: IMF

In practice, the Netherlands and, to a lesser extent, Italy have more flexibility than Germany or Austria to adapt to a shutdown by Russia. Italy uses a lot of its gas for electricity generation (nearly half its electricity is generated from gas, compared to 15% for Germany) some of which can be switched to alternative sources. And Italy can increase gas supplied from North Africa. Meanwhile, the Netherlands has its own natural gas fields and can switch some of its electricity generation back to coal.

With that in mind, we think the risk of an outright shortage of gas is much greater for Germany, followed by Italy. (Austria appears to be in a broadly similar position to Germany, while some central European countries are vulnerable, as discussed in our Eastern Europe service here.)

This view is consistent with analysis by the IMF (here) which suggests that Germany, Austria and Italy may have to compress gas demand significantly in the event of a total shut-down, but that the other major European countries would not.

The first-round effects of rationing

We now turn to the question of how governments would ration gas if they needed to do so, and what the economic impact would be.

Chart 7 shows the distribution of gas consumption in Germany between five broad sectors: industry, housing, business premises, electricity generation and district heating. A key question is how any cuts would be allocated between these groups.

Chart 7: German Consumption of Gas by Sector (2020, %)

Source: BDEW

Cuts to household gas consumption, most of which is used for heating, would generally have a smaller impact on economic activity than cuts to industrial consumption. Admittedly, if households cut back on gas consumption there would be some reduction in real household expenditure. But that would probably be offset by higher expenditure on other items, and there would be no disruption to the production side of the economy. In contrast, cuts to industrial gas use would by definition have a significant impact on output.

Nonetheless, the German government has said that, if it had to resort to rationing, it would protect households, along with essential services such as hospitals. In practice, the picture may be a bit more nuanced than this (see below) but this does suggest that much of the burden of any rationing would fall on industry.

Within industry a high proportion of gas is consumed by just a handful of industries. As Chart 8 shows, the chemical industry is the biggest gas consumer by far, accounting for 37% of industrial gas consumption or 14% of all the gas used in Germany in 2020. Any attempt to cut back on industrial gas consumption would have to start with some of the chemical and other major energy-intensive sectors.

Chart 9 shows an alternative breakdown focusing on the gas-intensity of production, rather than the sheer volume of gas consumed. In theory, cutting the supply of gas to these sectors should have the smallest impact on economic activity.

Box One: Historical Examples of Rationing

We have pointed out elsewhere that experience shows that GDP does not always decline dramatically as a result of energy rationing.

The most relevant experience is from Japan in 2012, where the government imposed cuts in the supply of electricity of 15% or more in some regions following the post-Fukushima shutdown of the country’s nuclear power stations. During the three months when power use was reduced, industrial production in those regions fell by only 4%.

One reason why the economic cost in Japan was relatively modest is that firms proved very adaptable, making innovations such as working outside normal hours and using batteries to store off-peak electricity, allowing them to improve the energy efficiency of production. In addition, firms and the public sector dimmed neon signs. And ordinary citizens embraced the drive for energy savings, often turning off appliances and lowering thermostats. Reports suggest that the sense of national solidarity and adversity were important motivations for people, as well as peer pressure. (Media outlets sent undercover reporters to check that businesses were not cheating by over-heating their premises, for example.)

A second example is the UK in 1974 when businesses were limited to three days’ electricity consumption each week for around two months during the so-called “three-day week”. On that occasion 40% power cuts for two months at the start of the year led to a reduction in industrial output of around 7%.

Based on these examples, we suggested that, as a rule of thumb, a 10% reduction in the supply of power would reduce industrial production by around 3%.

Unfortunately, this rule of thumb doesn’t translate directly to the current situation because Europe is facing a shortage of gas rather than electricity. But there are some relevant lessons. For example, we suspect that any rationing will be concentrated on industry rather than households, that there will be a lot of scope for businesses to make efficiency gains and adapt, and finally, that the success of any national campaign for voluntary restraint will depend a lot on creating a sense of national purpose.

Chart 8: German Gas Consumption by Major Sectors of Industry (Share, %, 2020)

Source: Destatis

The blue and black bars show the total amount of gas used in each sector both directly and indirectly per unit of value added. And the grey diamonds (on the right hand axis) show the size of the sectors as a share of the German economy. Together, the four most gas-intensive sectors (chemicals, base metals, paper and pulp, and pharmaceuticals) accounted for 3.6% of value added in the German economy in 2020.

Chart 9: Gas Use Per Unit of Value Added (Germany, 2020)*

Source: Refinitiv *“Indirect” refers to gas used in production in inputs.

Of course, political judgement would also influence any decisions about rationing: the head of Germany’s Federal Network Agency has indicated that production of paper use in medicine packaging would be considered “systemically important” whereas chocolate biscuit-making sadly would not! Moreover, some companies have pointed out that it can be costly to turn production processes on and off again: the chemical firm BASF has suggested that its huge site in Ludwigshafen would have to be shut down if gas supplies fall below 50 per cent.

With this in mind we will assume for illustrative purposes that if Germany is forced into gas rationing, the four most gas-intensive sectors would be required to cut their gas consumption by 50%. If output fell proportionately, that would directly cause a reduction in German GDP of roughly 2 percentage points whilst rationing was in place.

Other than in a very extreme scenario, this would probably be sufficient to bring demand into line with supply as it would reduce German gas consumption by around 7%. And if there were still a shortfall of gas, we suspect that the government would find a way to get households to reduce their consumption rather than impose even deeper cuts on industry – note that the Federal Network Agency has not ruled out power cuts for households. (See here.)

The indirect (second-round) effects of rationing

On top of these direct effect of gas rationing, there would be indirect effects which can be split into two categories: supply-chain problems and the effect on confidence or uncertainty.

The Bundesbank has estimated that direct supply-chain effects could increase the GDP loss from rationing to as much as two-and-a-half times the direct loss. (See here.) In contrast, an IMF Working Paper estimates that all second-round effects, including the substantial hit they expect from increased uncertainty, would roughly double the GDP loss from the first-round effect.

We suspect that the lower estimates will prove nearer the mark for several reasons. First, Germany says it will take account of the need for “safeguarding supplies of substitutes in production” and “the need to prevent damage to the economy and businesses”. (See here, page 24.) Of course, it will not be possible to avoid any second-round effects completely, but this offers some reassurance that the disruption will not be too large. It should also help that companies will have had some time to look for alternative suppliers or to build up their inventories.

In addition, there would be some reduction in activity due to rising uncertainty. The IMF has tried to quantify the scale of uncertainty using metrics such as the number of times the word “uncertainty” is used in publications by the Economist Intelligence Unit (!). Based on this approach, it concludes that this effect could be large. (See here, page 21.) While we would not put a lot of faith in these calculations, it does seem likely that increased uncertainty will dampen business confidence and investment.

All told, our sense is that these second-round effects would not be larger than the first-round hit to activity. That means that in our illustrative case German GDP would be, at most, 4% lower than it would have been because of the gas rationing.

Rationing limited to three-to-six months?

Finally, it seems most likely that gas rationing would last for months rather than years. This is largely because demand for gas is highly seasonal, typically peaking in January at around three times its July level. (See Chart 10.) In addition, governments’ plans to scale up alternative sources of gas, notably through improving the infrastructure to import LNG, should begin to bear fruit by next spring too.

Chart 10: German Gas Consumption (2014-22, BCM Per Month)

Source: Eurostat, Capital Economics

Bringing this all together, in our illustrative example we think that the hit to German GDP may be around 4% of GDP while rationing is in place, which would be for 3-6 months, meaning that the reduction in annual GDP is between 1% and 2%. The effect on euro-zone GDP would be a lot smaller because Germany accounts for 30% of euro-zone GDP and other countries will be much less affected. We will assume that euro-zone GDP declines by around 2% while rationing is in effect. (See Table 2.)

Table 2: Impact on Quarterly & Annual Euro-zone GDP from Rationing (%)

Impact on Quarterly GDP

Direct rationing effect


Indirect effect


Total (direct + indirect)


Months of rationing

Three to six

Impact on Annual GDP


- Euro-zone

-0.5% to -1.0%

Memo : Impact on German economy is twice as big.

Source: Capital Economics

Several downside risks

There are several reasons why the impact on economic activity from rationing could turn out to be much larger than this 0.5-1.0% of GDP figure.

  • First, the imbalance between supply and demand for gas could be much bigger than we have (implicitly) assumed. This could result from a shortfall in electricity generated by hydro, nuclear and other sources, for example. If so, bigger cuts in the supply of gas to industry would be needed.
  • Second, governments may have little success in persuading households to reduce their gas consumption, in which case more of the burden would fall on industry.
  • Third, the knock-on effects of rationing could turn out to be bigger than we have assumed.

Table 3: Estimates of the Impact of End to Russian Gas Exports




Reduction in GDP (%)

Bundesbank Monthly Report

June 2022


40% of industry is supplied with gas throughout, limiting 2nd-round effects

3.25% btwn Q3 ‘22 and Q2 ’24.

IMF Working Paper



Two difference econometric models and several different assumptions used.

Range between 0.6% and 5.7%

for Italy.

IMF Working Paper



Households fully protected, cuts spread evenly across industry.

4.4% over three years.

Bank of Italy Bulletin

July 2022


No policy response to mitigate the economic impact of rationing.



Sources: Various

As Table 3 above shows, estimates by organisations such as the IMF and euro-zone central banks have generally come with a large range of possible economic costs of rationing.

The impact on prices and inflation

Aside from the impact of rationing, a permanent shutdown of Russian gas exports would be sure to push wholesale natural gas prices up further, exacerbating the squeeze on household incomes. This would in turn make a recession deeper than we are currently forecasting.

Chart 11: European Natural Gas Price (€/MWh)

Sources: Refinitiv

While it is impossible to know how high prices would go in the event of a complete shutdown, a useful benchmark is that the price of TTF natural gas rose by around €40/MWh when Gazprom restricted the flow through Nord Stream to 40% in June and by a further €50 when it was cut to 20%. (See Chart 11.) On this basis, prices might be expected to rise by around €50/MWh, to €250/MWh, if Russia ended all exports through Nord Stream 1.

However, there are two reasons to think that the increase would be bigger than this. First, a total shutdown would mean Russia ending exports through its Ukraine pipeline as well as Nord Stream. As the Ukraine pipeline is currently supplying a similar amount to Nord Stream, a complete shutdown would remove the equivalent of 40% of Nord Stream’s capacity from the market. On top of this, it seems likely that the price response would rise the smaller the supply of gas. So for illustrative purposes we will assume that a total shutdown pushes the TTF price up to €400/MWh and that it remains at that level.

Chart 12 illustrates how this would affect retail prices of gas, solid fuels and district heating – the components of the euro-zone price index that are directly affected. The right-hand vertical axis shows the contribution of these prices to HICP inflation in percentage points. (The blue line assumes that natural gas prices fall to €150/MWh by end-2023, and the grey line assumes prices jump to €400/MWh and remain there.) The gap between the two lines suggests that the arithmetic impact of the higher gas price on inflation would be surprisingly small: headline inflation would be around 1ppt higher on average during 2023.

Chart 12: European Natural Gas Price & Gas, Solid Fuels and District Heating Inflation (%)

Sources: Joint Economic Forecast (Germany)

In practice, we suspect that the effect would be larger than this because there would be knock-on effects on other prices and potentially on wage settlements and inflation expectations. As a rough guide we suspect that, if the natural gas price jumped to €400/MWh and remained there, inflation would rise by around two percentage points in 2023 compared to our current forecast. That in turn means HICP inflation would average 6% next year, rather than 4% as we are currently forecasting.

We already expect aggregate household real incomes to fall by 2.5% over the course of 2022-23. An additional two percentage points on inflation next year would squeeze real incomes a bit further, although there would be some offsetting support from governments and some further increase in nominal wages to cushion the blow. That in turn would cause a slightly deeper recession than the 0.5ppts decline in GDP that we are currently projecting.

Table 4 summarises the impact that our scenario has for our forecast for euro-zone GDP in 2023. We are currently forecasting GDP growth of +0.5% next year. If Russia completely ended all gas exports to Europe, we have suggested that inflation would average 6% next year, rather than 4%, which might reduce GDP by around one percentage point. In addition, the direct and indirect effects of rationing could each reduce GDP by around 0.5ppts, assuming rationing was in effect for six months. In aggregate, these effects would reduce GDP by around two percentage points next year, meaning that rather than growing by 0.5ppts, GDP would contract by 1.5ppts.

Table 4: Euro-zone GDP Growth, 2023 (%)

GDP (no shutdown)


- inflation effect




- direct impact


- indirect impact


GDP (shutdown)


Source: Capital Economics

Despite the prospect of a slightly deeper recession we still think the ECB would be likely to press on with its planned series of rate hikes. Underlying inflation is already double the ECB’s target rate and the labour market is very strong. That said, if the economic downturn is even more severe than our adverse scenario, it is possible that unemployment may begin to rise and the ECB would not raise rates as far as the 2% peak that we are currently expecting.


Europe is suffering its biggest energy crisis since the 1970s. This is a key reason for the re-emergence of inflation as a huge challenge to policymakers and, we think, will push the economy into recession. If Russia turns off its supply of gas completely that would simply make a bad situation worse. Outright quantity rationing may be required. But even without that the resulting further increase in prices will exacerbate the region’s cost-of-living crisis and put more pressure on the ECB to raise interest rates.

Andrew Kenningham, Chief Europe Economist,

Andrew Kenningham Chief Europe Economist
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