Europe faces a new recession due to gas prices

A recession is back on the agenda in Europe due to gas prices reaching a new record. With expectations that the ECB will tighten more slowly than the Fed, the euro/dollar parity has fallen to around 1.02 and may continue to fall to 1.00.

Europe faces a new recession due to gas prices

Europe’s deepening energy bottleneck and the expectation that the European Central Bank (ECB) will move more slowly than the US Federal Reserve due to recession concerns have brought the pair to 20-year lows. Experts are predicting that the euro/dollar parity may reach parity with growing recession concerns as European benchmark natural gas is rapidly rising to 175 euros/mwh.

The euro/dollar pair fell 1.7 percent to 1.023 on Tuesday as services PMI data from the Eurozone signaled a deteriorating outlook for the region. This level was last seen 20 years ago in December 2002. Today the European Commission will publish its new economic forecasts and a pessimistic revision could further accelerate the decline in the pair. The dollar index also hit a new 20-year high of 106.78 on expectations that tightening would continue. Recession concerns also prevail in bonds. While the yield on 10-year US bonds fell to 2.8 percent, the yield on the 10-year Bund fell below 1.19 percent.

Parity is “only a matter of time”

Jordan Rochester, Nomura International G10 Forex Strategist, told Bloomberg TV, “Putin could push the Euro even lower. Now is not the time to buy the Euro,” he said, pointing out that the decline will continue. Neil Jones, Mizuho’s head of forex sales to financial institutions, said, “It is only a matter of time before the pair falls to 1 level.” Dominic Bunning, Director of European Forex Research at HSBC, is among those who expect euro/dollar to fall to parity this year and says, “There is not much positive to say about the euro at the moment.” The euro also fell nearly 1 percent against the Swiss franc to a 7-year low of 0.99.

75 bps expected from Fed, 25 bps from ECB

Traders’ expectations for the ECB’s rate hike this year in total have fallen from 190 basis points (bps) three weeks ago to 140 bps now. The Fed, which raised rates by 150 bps in the last two meetings, is expected to raise rates by 75 bps at the July meeting, while the ECB is expected to tighten by only 25 bps.

BoE is also pessimistic: Deep recession possible

The Bank of England (BoE) also emphasized that the global economic outlook has become pessimistic in its financial stability report published yesterday. The Bank stated that the global economic outlook deteriorated significantly as the increase in commodity prices triggered inflation around the world, and warned that volatility in energy and raw material costs could cause economic shocks in the future.

The report stated that the bank stress tests for 2022, in which the possibility of a ‘deep recession’ will be evaluated, will start in September and the results will be announced by mid-2023. The report also stated that many households are in good financial condition despite rising inflation and borrowing costs. It was emphasized that high interest and input prices, weak economic growth and ongoing supply chain challenges will continue to put pressure on corporate profitability.

The Bank also stated that inflationary pressures were exacerbated by Russia’s invasion of Ukraine and that price increases put pressure on households’ real incomes.

ISM Manufacturing PMI data from the US pointed to a sharper slowdown than expected. The index fell to 53 from 56.1 in May. The expectation was 54.5. Inventories rose, while the new orders sub-index fell sharply from 55.1 to 49.2, the lowest level since May 2020. The employment sub-index also fell from 49.6 to 47.3, the lowest level in nearly two years. Sarah House, Senior Economist at Wellls Frago, is just one of many predicting a recession in the US in 2023, and her views that the Fed’s harsh tightening could lead to a recession are also shared.

Habeck likens gas crisis to “Lehman Brothers”

The biggest source of recession worries and an expected prolonged strike in the energy sector in Norway, which is critical for the Union’s independence from Russian fossil energy, are also influential in the record increases in natural gas prices. Asian competition in an increasingly tight market is also accelerating prices.

Benchmark natural gas, which was below 90 euros at the beginning of June, almost doubled in less than a month, reaching over 176 euros on Tuesday. Maintenance on the Nord Stream pipeline, which is due to start on July 11, could complicate things in Germany, the biggest consumer. Germany is currently discussing a €9 billion bailout package for the energy company Uniper.

Moreover, German Economy Minister Robert Habeck likened the gas crisis to Lehman Brothers, the symbol of the financial crisis, and warned that it “could trigger a market crash”. It is not yet known how severe Russia’s retaliation will be, but the International Energy Agency said in a report on Tuesday that “a complete cut-off of gas is still a possibility.” Goldman Sachs analysts see a complete cut-off as the least likely scenario, but gas flows are likely to continue to decline. Currently, the flow on the Russia-Europe pipeline is at 40 percent capacity ‘due to technical problems’.

Both services and manufacturing slowed in Europe

Final services and composite PMI data for June released by S&P Global indicate that the war had a bigger impact on growth in the Euro Area than expected. The Composite PMI, which tracks private sector activity for all manufacturing and services sectors, fell by almost 3 points from 54.8 in May.

It was the weakest activity growth since February 2021. New orders fell from 53.3 to a contraction-line 50. The services PMI fell from 56.1 to 53 and the new business index fell from 55 to 51.8. In Germany too, inflation is hurting demand and the services PMI fell from 55 to 52.4. New orders fell from 51.5 to 47.1, in contraction territory.

The services new business index also fell from 53.7 to 49, in contraction territory. In France, services growth was below expectations, the index fell to 53.9. The composite PMI fell from 57 to 52.5. In Spain, services continued to grow due to the impact of tourism, but the services PMI fell from 56.5 to 54. In Asian economies such as China and India, services sectors strengthened above expectations.

CITI: Recession could drop oil to $65

Although the strike in Norway fueled supply concerns, recession concerns started to come to the fore again in oil prices. The fact that OPEC countries do not have the capacity to increase production sufficiently and the disruption of production in Norway, the most important alternative of the EU, which is trying to become independent from Russia, by a strike had increased oil prices in the last week.

However, with concerns that rising energy prices, especially in the Eurozone, could trigger a recession, the decline in oil exceeded 9 percent and Brent fell to 102.42 dollars and WTI to 99.45 dollars. “If there is a recession, oil prices could fall to $ 65,” Citi Chief Oil Analyst Amrita Sen told Bloomberg. Sen stated that if there is no recession, but there is a problem in supply and demand cannot keep up, there is no ceiling in prices, and $ 200 and $ 300 are also possible.

Prepared by the editors of “ancient idea” economics.