Russia’s invasion of Ukraine and the lingering effects of the pandemic have reeled countries around the world, but the relentless series of crises has hit Europe hardest, causing the steepest rise in energy prices, some of the highest rates of inflation and the greatest risk of recession.
The consequences of the war threaten the continent with fears that could become the worst economic and financial crisis in decades.
While growth is slowing globally, “it’s more severe in Europe overall because it’s being driven by a more fundamental deterioration,” said Neil Shearing, group chief economist at Capital Economics. Real incomes and living standards are falling, he added. “Europe and the UK are just worse off.”
Several countries, including Germany, the region’s largest economy, have built decades of dependency on Russian energy. The eight-fold increase in natural gas prices since the start of the war poses an historic threat to Europe’s industrial might, living standards and social peace and cohesion. Plans for plant closures, rolling blackouts and rationing are being drawn up in the event of severe shortages this winter.
The risk of falling incomes, rising inequality and rising social tensions could “result not only in a fragmented society but also in a fragmented world,” said Ian Goldin, professor of globalization and development at the University of Oxford. “We haven’t seen anything like this since the 1970s, and it’s not going to end any time soon.”
Other regions of the world are also coming under pressure, although some of the causes – and prospects – differ.
Higher interest rates, used aggressively to suppress inflation, are cutting consumer spending and growth in the United States. Still, the US job market remains strong and the economy is moving forward.
China, a powerful engine of global growth and an important market for European exports such as cars, machinery and food, faces problems of its own. Beijing’s policy of continuing to freeze all activities during the Covid-19 outbreak has repeatedly paralyzed large parts of the economy and led to global supply chain disruptions. In the past few weeks alone, dozens of cities and more than 300 million people have been in full or partial lockdown. Extreme heat and drought have paralyzed hydroelectric power generation, forcing additional plant closures and power outages.
A troubled real estate market has contributed to economic instability in China. Hundreds of thousands of people are refusing to pay their mortgages because they have lost confidence that developers will ever deliver their unfinished housing units. Trade with the rest of the world took a hit in August and overall economic growth, while likely to outpace rates in the United States and Europe, looks set to slip to its slowest pace in a decade this year . The prospect has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.
Understand the fall in US gas prices
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Understand the fall in US gas prices
Demand pushes prices down. As gasoline prices rose, people adjusted their driving habits to match prices, which hit an all-time high in June. Fewer drivers on the road have made gasoline more affordable, and some states have also suspended taxes on gasoline to drive down prices.
Understand the fall in US gas prices
Oil prices have fallen. Just two months ago, oil prices, which are linked to gas prices, surpassed $120 a barrel, helping push the national average price of gasoline down to about $5 a gallon. But prices have steadily declined as oil production has increased, which has helped drive down gas prices and allay broader recession fears.
Understand the fall in US gas prices
Gas prices vary. Despite the overall decline, gas costs can vary significantly at the state level. In California, pollution control regulations make it more expensive to drive, so gas prices will be higher than in a state like Georgia, which has lower gas taxes.
Understand the fall in US gas prices
A political boost for Joe Biden. The cheaper prices are a political win for President Biden, especially as falling fuel costs have lowered headline inflation. However, experts are unsure if the low prices will last as oil prices are volatile and driven by myriad forces, many of which are difficult to predict.
“The global economy is undoubtedly slowing down,” said Gregory Daco, chief economist at global consulting firm EY-Parthenon. but it “happens at different speeds”.
Elsewhere in the world, countries capable of supplying essential materials and goods – particularly energy producers in the Middle East and North Africa – are seeing better-than-expected gains.
And India and Indonesia are growing faster than expected as domestic demand rises and multinationals seek to diversify their supply chains. Vietnam is also benefiting from the fact that manufacturers are relocating their operations to its coasts.
Even so, China, the Eurozone and the United States together account for about two-thirds of the planet’s economic activity, and if these powerhouses all slow down, it will be difficult for any country to isolate itself from the consequences.
Poor people, who spend much more of their total income on food and energy, are hit hardest.
In Europe, fears of cold living rooms, closed production lines and staggering energy bills this winter intensified this week after Gazprom, Russia’s state-owned energy company, said it would not resume natural gas flows through its Nord Stream 1 pipeline until Europe died lifted sanctions related to Ukraine.
Average daily prices for electricity in western Europe have reached record levels, according to Rystad Energy, rising to over 600 euros ($599) per megawatt-hour in Germany and 700 euros in France, with peak hourly rates of up to 1,500 euros.
In the Czech Republic, around 70,000 angry protesters, many with ties to far-right groups, rallied in Prague’s Wenceslas Square last weekend to demonstrate against soaring energy costs.
The German, French and Finnish governments have already stepped in to save domestic energy companies from bankruptcy. Despite this, Uniper, which is based in Germany and one of Europe’s biggest buyers and suppliers of natural gas, said last week that it was losing more than 100 million euros a day due to the price hike.
The cost of all these measures would be enormous at a time when national debt is already staggering. Concerns about dangerously high levels of debt prompted the International Monetary Fund this week to put forward a proposal to reform the European Union’s framework for public spending and deficits.
Yet an unforgiving and unyielding reality remains: a lack of energy for countries to afford.
At current prices, there simply isn’t enough to produce the steel, wood, microchips, glass, cotton, plastic, chemicals and electricity used to make food, heating, garage doors, tampons, bicycles, baby food, wine glasses and so on become more than consumers want.
The root of the shortage lies before the Ukraine war.
Commodity prices started to rise in 2020 as countries began to ease themselves from pandemic restrictions, noted Sven Smit, senior partner at consultancy McKinsey & Company. In the United States alone, consumers actually bought $1 trillion more than expected in goods based on spending patterns prior to the coronavirus outbreak.
Read more about oil and gas prices
And the sudden shift in spending on products like new kitchen tiles and cars instead of services like restaurants and entertainment compounded the problem, as more energy and materials are needed to make them.
There’s a “exhausted supply chain” more than a broken one, Mr Smit said. “This is a physical rather than a psychological crisis,” different from those most people remember.
In the past, “you were scared of something, you stopped spending and then you got more comfortable and the spending came back,” Mr Smit said. “That’s not what’s happening right now. In order to solve this mystery, we must restore supplies.”
This conundrum is complicated by the need to produce energy that is not only readily available and affordable, but also does not exacerbate the catastrophic climate change already threatening the planet.
Achieving this goal will take years instead of months.
In the near term, capping energy prices could bring relief to struggling homes and businesses, but economists fear it will dampen the incentive to reduce energy use – the key goal in a world of scarcity.
Central banks in the west are expected to continue raising interest rates to make borrowing more expensive and keep inflation down. The European Central Bank will raise interest rates again on Thursday. The Federal Reserve will likely do the same when it meets this month. The Bank of England has taken a similar position.
The concern is that vigorous pressure to cut prices will plunge economies into recessions. Higher interest rates alone won’t lower the price of oil and gas — unless the economy collapses so badly that demand falls sharply. Many analysts are already forecasting a recession in Germany, Italy and the rest of the euro zone before the end of the year. For poor and emerging countries, higher interest rates mean more debt and less money for the most vulnerable.
“I think we’re living through the greatest development disaster in history, with more people being pushed into abject poverty faster than ever before,” said Mr Goldin, the Oxford professor. “It is a particularly dangerous time for the global economy.”
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