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Consequences of an energy embargo: the Bundesbank warns of recession

Status: 22/04/2022 15:04

An escalation of the war in Ukraine and further sanctions against Russia would hit the German economy hard. If an energy embargo is also enacted, Germany risks a recession.

A further escalation of the war in Ukraine and the tightening of sanctions against Russia would have hit the German economy hard, according to the Bundesbank’s calculations. “In the aggravated crisis scenario, real gross domestic product (GDP) would decrease by almost two percent this year compared to 2021,” the central bank experts write. Already high inflation, which is likely to rise again if the war escalates, also plays a role here. This is what emerges from the monthly report published today by the German central bank.

In the scenario, Bundesbank experts assume, among other things, that the EU will decide on an oil and gas embargo in response to the escalation of the war in Ukraine. In their estimates, the experts used computational models to record the effects on the economy.

Possible GDP losses of more than three percent

According to economists, GDP losses this year would be between 1% and 3.25% if an energy embargo actually occurred. In the euro area as a whole, economic output would be 1.75% lower than the ECB’s March forecast if the war escalated. They assume that no substitute for Russian gas supplies will be found in the short term. In the more precise calculation variant, they assume that energy supply shortages directly affect energy-intensive sectors such as the chemical industry as well as suppliers.

How likely is such an energy embargo to be agreed soon? According to the ifo institute, the EU is embarrassed on this issue: “On the one hand, more time would give the EU the opportunity to better prepare itself by organizing alternative energy sources, reducing demand and also the logistics of energy flows to the internal in the EU and optimized in individual countries, “said ifo researcher Karen Pittel. On the other hand, an oil embargo should not be postponed forever. “Because more time would allow Russia to find other buyers while EU revenue continues to pour in.” In addition, incentives in EU countries to prepare for the freezing of Russian energy supplies would be reduced.

Inflation could rise again

Energy prices are already at a high level and should continue to drive inflation if they rise again. If we then add an embargo, inflation this year would be about 1.5 percentage points higher than in 2021, according to Bundesbank experts: “The effects will be even greater the following year”. Inflation would also be higher in 2024, but not that much.

Dorothee Holz, HR, on the Bundesbank warning of a recession

tagesschau24 4pm, April 22, 2022

“The effects of Russia’s aggressive war against Ukraine on the German economy were initially limited,” the Bundesbank said. However, disruptions in foreign trade and supply chains, the dramatic rise in energy prices and heightened uncertainty have weighed on businesses and individuals. Experts therefore speculate that the German economy stagnated at the beginning of the year.

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