Chart of the Week: Gas supply and the EU economy

In Fathom’s Global Outlook, Spring 2022[1] we warned that a Russian energy embargo would lead to a European recession. While a full embargo has not yet been implemented, it is likely that economic contraction has already arrived; and the record price of natural gas will cut demand further in the coming months. The EU aims to reduce gas consumption by 15% this winter, but achieving this goal will be hard; consumption declined by less than 3% in 2020 when most of the bloc was in lockdown for several months. Should Russia’s gas supply to Europe reduce further, or the winter be particularly cold, higher energy prices and a recession may still be insufficient to equilibrate supply and demand, raising the prospect of involuntary cuts to energy use. If rationing was implemented, and households shielded, then industry (which accounts for around 40% of the EU’s natural gas use and is already facing weakening global demand) would face additional headwinds in the coming quarters. The natural gas shock is idiosyncratic to Europe, and has led to an unprecedented divergence in expected inflation between Germany and the US. A divergence in economic activity appears likely too, with the US outperforming.

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[1] A selection of charts from Fathom’s latest Global Outlook is available for all Refinitiv users via the key themes folder in Chartbook

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