OECD EXPECTS RECESSION

IN EUROPE FOR 2023

And the euro zone occupies a prominent place in this very dark picture: its growth is undergoing the most significant revision of all the regions of the world, forecast at 0.3% – against 1.6% in June. The OECD also anticipates a recession scenario for Germany in 2023, that is to say a period of decline in its economic activity over at least two consecutive quarters. German GDP – the largest European economy – is expected to plunge next year, down 0.7%, while the previous forecast predicted an increase of 1.7%.

“This OECD forecast is realistic. It is consistent to consider that in the Euro Zone, it is probably Germany that will suffer the most this winter from the energy shock”, explains Gustavo Horenstein, economist and fund manager at Dorval Asset Management. “The recession that will affect Berlin is expected because of its dependence on Russian gas and the importance of the manufacturing industry in its GDP – a sector which is very sensitive to questions of energy supply. »

Unlike Berlin, its main European neighbors should escape this prospect: growth of 0.4% is expected in Italy, 1.5% in Spain and 0.6% in France – while Bercy still expects 1% for its 2023 budget. But these OECD forecasts could still be revised downwards depending on the evolution, this winter, of the current energy crisis.

"If it's very cold, stocks will run out faster"

“Significant uncertainties surround these projections”, notes the organization, which points to a risk “of worsening fuel shortages, in particular gas” in the event of a particularly harsh winter. Growth in the euro zone, forecast at 0.3%, could then be further reduced by an additional 1.25 percentage points in this worst-case scenario. This would then have the effect of inevitably plunging the vast majority of countries in the region into recession for the whole of 2023.

The recession in several European countries “will quite simply depend on the temperatures this winter”, according to Gustavo Horenstein. “If it's very cold, stocks will run out faster. The risk is that the demand for gas and electricity for heating is much higher than the production capacities (of these two energies). »

And in a context of already high gas and electricity prices, the risk of shortages exists this winter according to the OECD: “This could happen if additional non-Russian supplies from non-EU countries do not materialize to the extent expected, or if gas demand is exceptionally high due to a severe winter. »

The organization acknowledges that EU gas stocks have been “significantly boosted” this year – between 80% and 90% in most member states – but may prove to be “insufficient”. “A harsh winter could significantly accentuate shortage phenomena,” warns the OECD.

The OECD has established three scenarios relating to the levels of European gas stocks over the winter of 2022-2023.

The international organization for economic studies has also established different scenarios relating to the levels of European gas stocks over the period October 2022 - April 2023. The first assumes a 10% drop in gas consumption , the result of the implementation of energy sobriety plans by several European countries. In this case, stocks would be sufficient for this winter.

In the other two scenarios, the energy situation would become really tense in Europe: in the case of gas consumption similar to the period 2017-2021, there would be an "acute risk of disruption of energy supplies" in February 2023. And for the “harsh winter” scenario, the fall in the level of gas stocks below 30% – corresponding to a normal operating level – would take place in January.

In addition to the winter weather, the "ability of industry in particular, and of European economies in general, to manage their energy consumption will also be important", notes Gustavo Horenstein.

“Probably no improvement before 2024”

The vertiginous rise in energy prices is already threatening the activity of a growing number of energy-intensive industries – some are forced to reduce their activity, like Duralex and others in the steel industry.

“Most governments, when it comes to dealing with energy issues, prioritize households, utilities, hospitals… and productive industry comes last. In the event of a recession, this is probably where there will be the most damage this winter in Europe, ”said Gustavo Horenstein. In the event of an aggravation of the energy crisis, gas and electricity savings could in fact primarily affect industries which, by reducing their production, would have an impact on the economy of the Euro Zone – this sector represented 23% of European GDP in 2021, according to the World Bank.

Whatever measures are taken in the short term, “the reconstruction of the European energy sector will take years”, notes Gustavo Horenstein.

"We will probably go through a difficult time with a strong economic slowdown. The recession and the domestic inflation to fight are in front of us, we will probably not see an improvement before 2024."