Europe should not count on a traditional economic recovery. Due to second-round effects, inflation will widen further by 2023. And, ING chief economist Carsten Brzeski says, don’t count on gas prices coming down either. Nay, on the contrary, the real energy crisis will come next year.
Addressing an Amsterdam CFA conference on Thursday, Brzeski said he believes the gas crisis will remain contained this year. That’s partly because Russia’s Nordstream pipeline supplied enough gas through the year. But after September’s deliberate sabotage to the pipeline, that will change.
“Next year we are moving towards lower reserves, because of less supply, partly because China (after the corona crisis, ed.) is becoming a demander of (LNG) gas again,” Brzeski warned. He expects less supply and more demand by 2023. “It will be difficult to get gas reserves in Europe to 95 per cent, like this year.”
All indicators down
Using charts and tables, Brzeski pointed out that all business cycle indicators are down. The fact that the labour market remains stable is due to the ageing wave passing through Europe. Inflation, the ING economist finds a very difficult subject: while in the US there is «demand-driven” inflation, in Europe there is «supply side» inflation, of which energy accounts for 30 per cent. This has major consequences especially for lower incomes, Brzeski warned.
He asked himself the rhetorical question: what will the government do? Intervene, as it did in 2008 and 2020? Brzeski doubts that. “There are limits to what the government can do,” he said. The issue of debt sustainability will return, he says, as it did after the 2008 crisis.
“Should you as a government want to do everything? No,” he said, adding that Joseph Schumpeter’s so-called creative destruction is not only inevitable, but healthy for the longer term.
Brzeski sees the war in Ukraine as a «gamechanger». He predicts «greenflation». The move towards renewable energy will accelerate. But initially accompanied by higher prices as more fossil resources are needed.
Deglobalisation is coming
Not much will change in that respect, he said, because “no European politician dares to negotiate with Putin”. The consequences will be especially severe for industrial countries like Germany and Italy. He points out that many companies are considering defecting to other countries and regions, especially the United States, which is now a net exporter of energy.
He foresees a process of deglobalisation, with implications for just-in-time deliveries, production in one’s own region and increasing political pressure on companies. “Those three issues will drive up inflation,” Brzeski warned.
The recession in Europe will be “mild” for now. That recession will cause interest rate hikes to end at the end of this year. But by the end of 2023, interest rates will rise again, but those “will not be as high as necessary”.
Paradigm shift needed
Brzeski argued that current developments will cause a paradigm shift in Europe. “Structural changes are needed in Europe. Otherwise, the recovery will be sub-optimal, as southern Europe shows with every recession and recovery.” He now sees that risk for Germany, Europe’s locomotive, too.
“The problem is that no country has yet started to make structural changes,” argued Brzeski. The ING economist added, in response Investment Officer questions, that while his story on Europe is bleak, his view of Germany as Europe’s engine is even “pitch black”. Reason: structurally high energy costs and German companies highly dependent on China in large numbers.