German industry faces permanent blow from loss of Russian oil

‘Costlier sources of energy will likely have an impact on eurozone competitiveness’

EUROPE’S economies face a permanent blow from higher energy costs as the Continent weans itself off cheap Russian energy, Barclays’ chief economist for the region has warned.

Silvia Ardagna at the bank said the bloc’s push for “independence from Russian gas” will pull down growth, push up inflation and drag down the euro.

“Costlier sources of energy will likely have an impact on eurozone competitiveness,” Ms Ardagna said.

Industrial powerhouses Germany and Italy have built positions in global markets in part because of plentiful oil and gas from Moscow’s pipelines. But they face losing access to those resources as Russia threatens to cut off supplies, and Europe seeks to end purchases from the aggressive dictatorship.

The shift has already led to a sharp slump in the economies of Germany and Italy as their powerful manufacturing sectors – which were suffering from pandemic-induced supply problems even before the energy crisis – struggle with higher power costs. In contrast with Europe, American industry is likely to be a winner as the country is awash with locally produced hydrocarbons. Some of these can be exported to Europe, which is trying to expand its capacity to import liquefied natural gas (LNG) but the gap in prices may be so large as to push manufacturing out of the eurozone and into the US.

“Domestic producers may be able to respond to high prices by increasing energy extraction and expanding LNG capacity. And if gaps in energy costs between the US and the rest of the world persist, some manufacturing industries may well relocate to the US,” said Ms Ardagna.

“One implication of higher domestic manufacturing production would be a stronger dollar.”

This comes after a surge in the dollar on the back of rising interest rates, which has pushed down other currencies including the euro and sterling this year. At the same time the eurozone’s enormous energy bill drags its currency down, with further falls likely required to try to restore some competitiveness to German industry. So far this year the euro has fallen 12pc against the dollar with one euro worth just below $1.

Barclays believes Germany has already entered recession, with GDP set to fall for at least four consecutive quarters. Its economists predict Italy, France, Spain and the eurozone overall will start shrinking in the final quarter of the year, which will trigger a recession for the entire currency area.

Inflation in the eurozone is set to fall only slowly, from 8.2pc this year to a 6.3pc next year, Barclays predicted. In Germany, prices are expected to keep rising by 6.7pc in 2023.

The bank’s economists also forecast a shorter recession for the UK, and a brief downturn at the start of next year for the US.