Bundesbank Sees German Economic Turmoil Worsening All Winter Amid NatGas Rationing

Russia’s reduction of natural gas exports to Europe’s largest economy, Germany, ahead of the cold season spells trouble. On Monday, the country’s central bank warned that the energy crisis could worsen as NatGas consumption is cut or rationed, leading to even more economic turmoil. 

Germany largely depends on Moscow’s NatGas flows, receiving about half of its supplies from Russia before the Ukraine conflict. But since the invasion, Kremlin-controlled energy giant Gazprom has reduced NatGas supplies to zero on the Nord Stream 1 to Germany. 

The Bundesbank forecasted the economy would shrink even if widespread rationing is averted as energy-intensive manufacturers would have to slash production. 

“Economic activity may pull back somewhat this quarter and shrink markedly in the autumn and winter months,” the central bank said, adding that it didn’t forecast this adverse scenario in a June report. 

Bundesbank continued: “There are mounting signs of a recession in the German economy in the sense of a clear, broad-based and prolonged decline in economic output.” It said a contraction is expected in the third quarter with deeper declines in economic activity in the fourth. 

“High inflation and uncertainty with regard to energy supply and its costs affect not only the gas and electricity-intensive industry and its export business and investments, but also private consumption and the service providers dependent on it,” the central bank said. 

The latest estimates from Bloomberg show Germany and much of the euro area has around an 80% recession probability in the next 12 months. 

Source: Bloomberg 

… and also comes as the European Central Bank is inflicting pain on the bloc with aggressive rate hikes to address sky-high inflation. Two oversized rate hikes in July and September, and ECB officials promised more hikes into fall. Hiking into a downturn is grounds for policy error. 

Source: Bloomberg 

The incoming German recession depression has been on everyone’s radar as things could materially worsen if NatGas supplies are rationed. Putin appears to be waging a multi-front war against Ukraine and the West, as he could singlehandedly force a recession in Germany and across the continent this winter.