The Energy Price Surge Is Squeezing Europe’s Economy

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Soaring energy prices are putting the squeeze on European consumers desperate for some relief after two years of coronavirus, lockdowns and job worries.

The financial pain is taking a toll on households, who are more worried about prices than at any time this century, and feel less inclined to splurge, according to a European Commission survey. If demand suffers as a result, that has implications for how quickly the economy can fully recover from the destruction wrought by the pandemic.

Wholesale gas prices are up almost 300% in the past year because of unusually low storage levels, increased demand from economies emerging from the pandemic and capped flows from Russia.

That's driven inflation higher, and Bank of America says the economy has “come under pressure from the consumer purchasing power squeeze.” It estimates that household energy costs will rise 50% this year, and aid from governments to shield households will only offset about a quarter of that.

A model by Bloomberg Economics estimates that the energy crunch could knock up to 1% off gross domestic product. The impact will vary across countries, and government support could mean a less extreme fallout.

Read more: EURO-AREA INSIGHT: What the Energy Crunch Means for Growth

“We are talking about not insignificant sums, especially for poorer households,” said Georg Zachmann, an energy market specialist at Bruegel. “If you take that money out of the pockets of poorer households it will have an effect on consumption.”

Banque Pictet & Cie estimates the energy price surge could knock 0.2 percentage point off growth this quarter. There’s also an impact if it forces energy-intensive companies to cut production. The World Bank warned on Tuesday that a sustained crisis “would present a notable downside risk to the near-term euro-area outlook.”

UBS AG economists this week cut their forecast for the region’s 2022 expansion to 4.2% from 4.8% because of omicron and new restrictions. They also see a downside risk from a further rise in energy prices.

But the economic impact may be limited because consumers still have a large amount of savings built up during the pandemic, and the labor market looks solid, which should support wages.

“It’ll be a problem for lower-income households. Here, the squeeze through higher energy prices is clear,” said Reinhard Cluse at UBS. “For the household sector as a whole, the forced savings will help to digest it.”

So far, the crunch is being particularly felt in Europe’s east, home to the top 10 countries in terms of how much consumer spending is taken up by energy bills.

In Poland, miners from the biggest coal producer in Europe blocked the fuel from reaching power plants for two days last week over unpaid overtime they worked to meet a spike in demand last year. They’re also demanding raises, effectively to help them pay the bills for the energy that they generate.

Inflation in Poland is at 8.6%, the highest in more than two decades. In the euro area, it’s at 5%, a record for the region, with Estonia and Lithuania experiencing double-digit rates.

While inflation is expected to ease this year, that’s not going to undo the pain. Central bankers’ arguments about a “transitory” spike don’t change the fact that prices are rising and the burden on consumers is mounting month by month.

There has been some bearish news recently, with European natural gas futures declining this week. But prices have been whipsawing, and a blast of cold weather or increased Europe-Russia tension could change the direction again.

“Short term, we do not think rising energy prices will threaten euro-area growth as governments have taken swift countermeasures,” said Nadia Gharbi, an economist at Pictet in Geneva. But a sustained increase “could challenge economic growth,” particularly if governments remove support, she said.

In the U.K., where two dozen household energy suppliers have collapsed, the crunch month will be April. That’s when the new cap designed to limit price increases kicks in. It’s expected to jump 50% to almost 2,000 pounds ($2,725).

‘Prohibitively Expensive’

Europe’s total primary energy bill will come in at about $1 trillion, according to Citigroup Inc. Yet, while previous peaks were largely driven by surging oil prices, this time it’s about the cost of heating and powering everything from homes to transport and big industrial plants.

“It is gas and electricity that is becoming prohibitively expensive in Europe,” Citi analysts including Alastair Syme wrote. “Consumers and industry across the region are likely going to have to make some tough choices about their energy consumption.”

Meanwhile, the cost pressure is pushing some to take radical steps.

Palettes53, a family-run palette maker near Le Mans in north west France, has decided to stop using the nuclear-powered supply and switch to a diesel generator.

Yannick Chopin, who runs the firm, says it’s his only option, even though he’ll need a lot of diesel. Sticking with mains supply would push energy spending up fivefold to 50% of total costs.

“If we didn’t act immediately, we’d run into cash problems,” said Chopin. “We’ve been through several crises, like the financial crisis in 2008. It’s this crisis that worries us the most.”

Strains on companies also have implications for consumers if firms have to charge more to protect profits. Portuguese paper producer Navigator said it would raise the price of tissues by 15% because of higher energy, logistics and commodities costs. Furniture retailer Ikea is increasing prices by an average of 9% across its markets, for similar reasons.

In the Czech Republic, soaring energy costs — exacerbated by the collapse of 14 smaller energy suppliers during the autumn spike in natural gas prices — have added to the pressure on Charita Litomerice, which runs a retirement home for 33 Alzheimers patients.

Karolina Wankowska, the head of the charity, said they’ve already had to cut the amount and quality of food they’re giving residents in their last stages of life.

“We’re in a really difficult situation,” she said. “After Covid, which also raised our costs, we’re facing unprecedented inflation and energy prices, and our suppliers are raising their prices.”

Read More:

  • Central Banks, Not Covid, Will Drive Global Economies in 2022

  • Europe Faces $1 Trillion Energy Bill This Year, Citigroup Says

  • U.K. Gives Itself Three Months to Find Fix for Energy Price Rise

(Updates with Citi in 18th paragraph)

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