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August 8, 2022

Recession is lurking around the corner

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 A worldwide recession is in the making with analysts estimating that it will arrive in 2023 though the United States may already be in a technical recession after a Q1 GDP decrease of 1.5% and prospects for Q2 to show even a higher decrease. High prices, energy squeezes, Covid uncertainty, decreasing demand are all factors that point into this direction.

May Eurozone inflation reached 8.6% year on year and the prospects for decrease are low. The main component of the increase in prices was energy up 41.9% year on year, food 8.9%, industrial goods 4.3% and services 3.4%.

Latest data from Romania shows that the industrial production prices increased 1.49% in May 2022 compared with April and 46.5% compared with the same month of last year. The largest increases are in the production and distribution of electricity, natural gas, hot water with 135% followed by the extraction industry with 116% and  manufacturing 27.8%. Out of the extracting industry the oil and natural gas made the bulk of the increases with over 200%. This is a direct result of the global energy crisis that pushed the prices up.

And the end is not in sight. Latest data shows that OPEC+ is struggling to meet its quotas and having almost no spare capacity left. In this context the G7 discussion to cap the oil prices may trigger Russia’s decision not to participate and to curb production. According to JP Morgan analysts, a 5 million barrels per day reduction in output has no excessive damage to the Russian economy. If this scenario materializes the oil prices could reach 380 dollars per barrel with a 190 dollars per barrel estimated price in case the reduction is in the zone of 3 million barrels of crude per day. But the market is not pricing yet this possibility with Brent trading around 110 dollars and futures showing prices below 100 dollars in the first quarter of 2023.

The energy crisis is starting to trigger bailout measures in Europe. Russia has reduced natural gas shipments to Germany through the Nord Stream pipeline by 60%. In July, the pipeline is scheduled for a full shutdown for maintenance and Germany has raised doubts that the natural gas will resume supply after that. This is already affecting the utilities company Uniper, which has daily estimated losses of over 30 million Euros. German Chancellor Olaf Scholz said his government is continuing talks on aid for the gas giant and signaled that bailout tools developed during the pandemic to rescue big companies like Lufthansa are on the table again. Analysts estimate that the costs to rescue Uniper for one year will exceed 11 billion euros.

The natural gas problem is amplified by the fact that factories are linked to the same pipelines as houses so a reduction on gas consumption for only the domestic consumers is not feasible. Because of the gas bottlenecks, other German industries are in danger of collapsing: aluminum, glass, the chemical industry, according to Yasmin Fahimi, the head of the German Federation of Trade Unions (DGB). As Germany is the largest European economy all this situation is amplifying the recession risks in Europe.

According to Nomura, recession is just around the corner as both the US and Euro area economies will contract in 2023 with 1%. In the US, Nomura forecasts a shallow but long recession of five quarters starting from the final quarter of this year. In Europe, the recession could be much deeper if Russia entirely cuts off the gas, the economists said. China’s economy is seen recovering with the help of accommodative policies, but the risk of renewed lockdowns remains due to Beijing zero-Covid strategy.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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