Goldman Sachs strategists believe that Europe's chances of recession are now twice as high as the US, as the growing energy crisis risks plunging the continent into economic recession.
According to the bank, rising commodity prices are likely to keep inflation high for longer and increase the risk of recession.
"The arguments for why the next recession is more likely to be severe in Europe are similar to the arguments for a higher risk of any recession," said a group of strategists led by Goldman Sachs chief economist Jan Hatzius. "Our subjective probability that the economy enters a recession in the next 12 months is the highest in the Euro area (60%) and the UK (35%), followed by the US (30%)."
Western sanctions against Russia have led to a sharp rise in commodity prices in Europe.
Before the war, the continent was heavily dependent on Russian oil imports, but since February it has had to turn to other sources of crude. Benchmark Brent and WTI crudes are now trading at more than $85 a barrel, 27 percent higher than Russia's Urals crude, which is currently worth just over $67 a barrel.
Russia also cut off natural gas supplies to the continent by cutting the capacity of the Nord Stream 1 pipeline to 20 percent and halting exports through the southern branch of the Druzhba pipeline, which supplied gas to the Czech Republic, Hungary and Slovakia.
Dutch TTF natural gas futures are now trading at 231 euros per megawatt hour, which means they have risen a staggering 176 percent since the beginning of June. In contrast, U.S. natural gas futures are trading at $9.36 per MMBtu, which equates to about $31.50 per megawatt hour.
Goldman Sachs said that the commodity crisis is likely to mean that prices will continue to rise in both the eurozone and the U.K. Inflation in the eurozone hit a record high of 8.9 percent in July, while U.K. data showed that inflation hit 10.1 percent last month.
"The contribution from energy to inflation is much larger and more back-loaded in the euro area and especially the UK than in the US," Hatzius's team said. "This implies a worse central outlook for real income, consumer spending, and industrial activity in Europe." "Larger gas supply disruptions, energy prices increases, or second-round effects via supply chains and confidence channels could make the Euro area recession deeper," they added.