JPMorgan Chase & Co. recently warned that the looming gas crisis in the euro zone, coupled with renewed political turmoil in Italy, will push the euro zone into a mild recession early next year and limit the European Central Bank from raising interest rates.
ECB economists cut their economic forecasts, expecting euro zone GDP growth to slow to 0.5% this quarter, before contracting by 0.5% in both the fourth quarter of this year and the first quarter of next year.
Two consecutive quarters of contraction are the traditional definition of a recession.
JPMorgan said in a Wednesday report that its new forecast assumes gas prices at 150 euros per megawatt-hour, combined with political turmoil in Italy, which would have a 2 percentage point hit to euro zone GDP.
The bank said its baseline forecast for gas prices of 150 euros/MWh would likely require flows at Nord Stream 1, Russia’s main gas pipeline to Europe, to remain around 40% of normal levels. This benchmark price is well below the current market price of €200/MWh.
However, Gazprom announced on Monday that due to "technical problems" at the Nord Stream 1, the supply of natural gas to Europe will be cut in half again from Wednesday (July 27) to normal. 20% of the standard.
Lower ECB rate hike expectations
High natural gas prices will also push up headline inflation in the euro zone by 1.2 percentage points in the short term, JPMorgan said. European inflation is likely to fall again next year as the economy reacts negatively, limiting the extent to which the ECB can raise interest rates.
The bank now expects the ECB to raise interest rates by 50 basis points by the end of the year, down from the 75 basis points it had previously forecast in three increments.
Specifically, JPMorgan expects the ECB to raise rates by 25 basis points in September and October, but not in December.
The sound of warning is endless
Goldman Sachs Group Inc. this week also forecast a recession in the euro zone, although economists at the bank said the recession has already begun in the current quarter.
The bank's economist Jari Stehn team said that the euro zone will experience a recession in the second half of this year and will continue until the end of this year, and the economy is expected to contract by 0.1% in the third quarter and 0.2% in the fourth quarter.
The International Monetary Fund warned on Tuesday that the European and U.S. economies will see little growth next year if Russia cuts off gas supplies to Europe entirely and cuts oil exports further.
Signs of a recession in Europe appear "clear" and Russia's decision to cut gas flows again could push Europe into a deeper recession, Citigroup's team of economists and strategists said in a report on Tuesday.