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Weekly global economic update

What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.

Meanwhile, Germany’s government has said it does not accept the Gazprom explanation for the curtailment of gas flows and fears that more trouble is brewing. A German government spokeswoman said, “We don’t see technical reasons. Our information is that this turbine is a replacement turbine that was earmarked for use in September but, again, we are doing everything to take away possible pretexts for the Russia side.” Gazprom has said that the recent disruption of supplies is beyond its control. 

There is a debate as to what Russia might do next, and why. If Russia halts or significantly reduces deliveries of gas to Germany during the winter months, the ostensible reason would be to undermine German determination to maintain sanctions, as well as to undermine German unity with other EU members. However, doing so might damage Russia’s reputation for being a reliable business partner and would likely cause an acceleration in German efforts to reduce dependence on Russia. Thus, the counterargument is that Russia has reduced deliveries as a warning but does not intend to fully upset its relationship with Germany. The well-known strategist Ian Bremmer says that, if Russia didn’t care about its future relations with Germany, it would not create implausible excuses for cutting gas deliveries. Time will tell. In any event, the European Commission says it does not expect gas flows to resume as scheduled and will plan accordingly. 

As for Russia, although it stands to lose revenue by reducing deliveries of gas, the sharp rise in oil and gas prices has significantly boosted revenue. In fact, the International Energy Agency (IEA) estimates that, since the war began, Russian revenues from oil and gas have doubled from the pre-invasion level. Thus, it is likely that Russia can afford to temporarily halt gas deliveries. That, in turn, suggests that Russia has the upper hand in this conflict—at least temporarily. In the longer term, the potential loss of Russia’s share of the EU energy market could be deleterious to Russia’s economic future. 

Given that Germany and other countries in Europe continue to be at risk of a substantial shortfall in gas, Germany’s government announced emergency measures to conserve gas. For example, the government will ask companies to allow employees to work at home so that heating systems in large buildings can be turned off; it will ban the use of gas to heat private swimming pools; heating of public buildings will be restricted; and there will be inspections to assure that homes are using energy efficiently. In addition, the government will lease floating LNG terminals; it is resuming the use of coal-fired power plants; and it has not ruled out delaying the closure of nuclear power plants. 

In addition, Poland is quadrupling its capacity to import gas with a new pipeline from Norway that crosses the Nord Stream pipeline under the Baltic Sea. The Baltic Pipeline is set to begin operations in October. Poland will be able to make up for the loss of Russian gas since April when Gazprom cut gas deliveries to Poland. It is possible that, with the new pipeline, Poland will be able to assist Germany. 

Finally, the EU signed a gas deal with Azerbaijan, but the full effects will not be felt until 2027. In addition, the European Commission called for Europeans to reduce gas consumption by 15% in order to boost storage in anticipation of the winter. European Commission President Von der Leyen said that this must be done to fight Russian “blackmail.” The EU also asked member states to give the Commission the power to implement gas rationing across Europe in order to prioritise supplies in the case of a Russian cutoff. Germany’s government already has a plan to prioritise which industries obtain gas in the event of a shortage. 

Now that there is a fear that Russia will cut gas shipments to Western Europe during the winter, the question arises as to the severity of the potential economic impact. The International Monetary Fund (IMF) says that a cutoff of up to 70% of Russian gas is manageable “in the short term by accessing alternative supplies and energy sources and given reduced demand from previously high prices.” Already, gas consumption in Europe in the first quarter was down 9% from normal levels while alternative sources were increasingly tapped. Major countries are taking steps to further reduce consumption and continue to seek alternative sources. 

However, the IMF says that a complete shut-off of Russian gas would lead to shortages of between 15% and 40% depending on the country. It also says that the severity of the economic impact will depend, in part, on the degree to which Europe can achieve sufficient integration so that gas is transmitted to where it is needed. If there is inadequate integration, the economic consequences will be more severe. Either way, the IMF estimates that the countries that will experience the worst economic consequences are Hungary, Slovakia, Czech Republic, Italy, and Germany in that order. 

The gas crisis in Europe did not just begin recently. The head of the IEA, Fatih Birol, said that “in September 2021—five months before Russia’s invasion of Ukraine—the IEA pointed out that Russia was preventing a significant amount of gas from reaching Europe. We raised the alarm further in January, highlighting how Russia’s large and unjustified reductions in supplies to Europe were creating ‘artificial tightness in markets’ and driving up prices at exactly the same time as tensions were rising over Ukraine.” Indeed, Russian flows of gas to the EU are now running at about 25% of the level seen a year earlier. Mr. Birol says that, in order to avoid disaster in the winter should Russia cut off gas, Europe must now take steps to conserve sufficiently to bring gas storage to 90% capacity. 

As for the price of natural gas in Europe, it initially tripled following the Russian invasion of Ukraine, but then fell back to close to the pre-invasion level. However, in recent weeks, the price has rebounded sharply, and is now roughly double where it was in early June. 


Deloitte Global Economist Network


The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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Cover image by: Sylvia Chang

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