Russian gas cut fear sparks EBRB warning of economic slump

Developed and emerging economies predicted to fall back as war in Ukraine and inflation rage

Gas installation at the Sofia Iztok thermal power plant in Bulgaria, which has been hit by a halt in Russian gas supplies to Europe. AFP

An abrupt halt of Russian gas exports could see economies in emerging Europe, Central Asia and North Africa slide back to pre-pandemic GDP levels, the European Bank for Reconstruction and Development warned on Tuesday.

The forecast echoed a similarly bleak prediction from the Organisation for Economic Co-operation and Development, which said economic growth would continue to lose momentum in Europe and the 38-member bloc as a whole.

Many countries in the European bank's region of operation, which covers about 40 economies stretching from Mongolia to Slovenia and Tunisia, depend on Russian gas and a sudden cease of supplies would lower output per capita by 2.3 per cent this year and 2 per cent in 2023, according to the lender's latest report.

"Europe is discussing to stop purchases of hydrocarbons from Russia," its chief economist Beata Javorcik told Reuters. "There is also the possibility that Russia would stop supplying its gas."

The lender estimates that economies across its region grew 6.7 per cent last year after a 2.5 per cent contraction in 2020, when Covid-19 swept through the global economy and financial markets.

But Moscow has already shut off gas flows to Poland and Bulgaria, and markets are focused on the impact of an EU embargo on Russian oil as well as how gas will be paid for by deadlines this month through Russian payment mechanisms.

Stopping gas flows would deal the biggest blow to EU member economies with both significant gas imports from Russia and a large dependence on gas in their energy mix, such as the Czech Republic, Hungary and Slovakia, the bank warned.

A sudden stop is not the lender's base case scenario, which assumes for its calculations a continued delivery of gas.

But even then, expansion is now expected to be more sluggish than the lender estimated in March, with growth forecasts trimmed to 1.1 per cent from 1.7 per cent, chiefly due to a larger-than-previously-expected contraction in Ukraine.

Inflation and manufacturing slump driving decline

The OECD's composite leading indicators suggested surging inflation and an attenuating manufacturing sector were the two drivers of European economic decline.

The financial auspices look a little better outside of the euro area and the UK, with stable growth forecast in Canada, Japan and the US.

Stable growth also continues to be anticipated in most major emerging-market economies, in particular China (industrial sector) and India. In Brazil, however, slowing growth is expected.

The CLIs aim to anticipate cyclical fluctuations in economic activity over the next six to nine months and are based on a range of forward-looking indicators such as order books, confidence indicators, building permits, long-term interest rates, new car registrations and many more.

Most indicators are available up to April 2022. In a statement, the OECD noted continuing uncertainties related to the war in Ukraine and the coronavirus pandemic are resulting in higher than usual fluctuations in the CLI components.

As a result, it said the CLIs should continue to be interpreted with care and their magnitude should be regarded as an indication of the strength of the signal rather than as a measure of growth in economic activity.

The forecast comes a week after the OECD reported inflation in the area surged 8.8 per cent in March, compared to the same month last year, as energy prices continue to rise.

The jump was the highest in the OECD area since October 1988, a rise that was caused by high oil prices and tight monetary policy in countries such as the US, Canada, West Germany, Italy, the UK and Japan.