Credit Suisse lowered its eurozone GDP growth forecast from 2.4% to 2.3% in 2022 and from 0.7% to -0.2% in 2023 (consensus: 2.7% and 1.3%). In sequential terms, the Swiss investment bank expects the economy to contract in the third quarter of 2022 through the first quarter of 2023 followed by a modest rebound from the second quarter of 2023 onwards.
In addition, the Zurich bank expects the most marked contractions in Germany and Italy“countries with large manufacturing sectors heavily dependent on Russian gas and, in the case of Italy, also due to internal political tensions ”.
Credit Suisse specified three triggers that would weaken the outlook sufficiently to make the recession base scenario:
- a further reduction in the Russian gas supply (to around 35 TWh / month)
- a sustained increase in gas prices (to ~ € 150-180 / TWh) e
- a sustained decline in high-frequency activity indicators (eg PMI, Ifo).
All of these triggers have now materialized, making a recession likely, according to CS.
Russian gas: strongly reduced flows will keep prices high but rationing can be avoided
According to the Zurich bank, Russian gas supply will remain severely curtailed in 2018 over the next few months (although a complete shutdown is not part of the baseline scenario as Russia would lose its influence).
Russia restarted gas flows through the North Stream 1 (NS1) pipeline on July 21 after a 10-day maintenance, averting the feared risk of a complete gas outage. However, flows only resumed at around 40% of capacity because only 2 out of 5 turbines were operational and further outages are likely.
Indeed, the July 25 announcement that one of the two operational turbines will shut down for maintenance means that NS1 flows will likely drop to 20%, at least temporarily (until the turbine currently returning from Canada is operational again).
Russian gas supplies to Europe are steadily declining (from 40% at the beginning of 2021 to 15% at the end of June 2022). Credit Suisse analysts expect this trend to continue. As the figures below show, the initial decline was largely offset by higher imports of LNG from the United States, but recent reductions in Russian gas flows due to NS1 outages have been more difficult to compensate for. That said, rationing could be avoided.
ECB will remain aggressive in the short term, but the rate hike cycle could end sooner than expected
According to Credit Suisse, record inflation will keep the ECB in an aggressive position at least in the short term despite weak activity.
Governing Council member Holzman recently said the ECB could overtake “A slight recession” if his inflation forecast were to increase further.
The ECB’s “meeting to meeting” approach will likely mean it will continue to raise rates by 50bps until inflation begins to decelerate visibly (which analysts at the Zurich bank do not expect before the start of 2023. ).
So Credit Suisse analysts maintain their forecast of two 50bps hikes in September and October, before returning to 25bp in December “but now we expect the bullish cycle to end earlier (in the first quarter of 2023, with the deposit rate all’1,5%) than before (in the second quarter of 2023, with the deposit rate at 2,%).”
