Europe's economy faces a permanent blow from higher energy prices, Barclays chief economist for the region Silvia Ardagna warned, The Telegraph reported.
The EU's push for independence from Russian gas will lead to a slowing economy, higher inflation and a falling euro, she said. More expensive energy sources are likely to affect the eurozone's competitiveness, Ardagna said.
The industrial centers of Germany and Italy have gained a foothold in world markets thanks in part to abundant supplies of oil and gas from Russian pipelines. But now they are in danger of losing access to these resources.
The shift has already led to a sharp downturn in the German and Italian economies, as their powerful manufacturing sectors, which even before the energy crisis suffered from supply problems caused by the pandemic, struggle with higher energy costs.
In contrast to Europe, U.S. industry is likely to benefit because the country is flooded with locally produced hydrocarbons. Some can be exported to Europe, which is trying to expand its ability to import liquefied natural gas (LNG), but the price gap could be so large as to push eurozone production into the states.
Domestic producers can respond to high prices by increasing energy production and expanding LNG capacity. And if the energy cost gap between the U.S. and the rest of the world persists, some manufacturing industries may well move to the U.S., Ardagna said. One of the consequences of higher domestic manufacturing production will be a stronger dollar.
That comes after a surge in the dollar amid rising interest rates, which has led to declines in other currencies, including the euro and the pound sterling, this year.
At the same time, the eurozone's huge energy bills are dragging its currency down, and a further drop is likely expected to try to restore some competitiveness to German industry as a lower euro would make its products cheaper on the world market.
The euro has fallen 12 percent against the dollar this year, with one euro worth just under $1.
Europe used to have a fairly large current account surplus because exports exceeded imports, but it's already completely eroded, Ardagna said.
The erosion happened because trade in energy goods went from a surplus to a very deep deficit, while trade in other categories, goods and services, was more or less unchanged. Over time, with this rise in energy prices, some competitiveness in other industries will be lost.
Barclays believes that Germany has already entered recession, and its GDP will fall for at least four quarters in a row. Its economists predict that Italy, France, Spain and the eurozone as a whole will start contracting in the last quarter of the year, causing a recession in the entire eurozone.
Inflation in the eurozone will decline very slowly, from 8.2% this year to a projected 6.3% next year, according to Barclays. In Germany, prices are expected to continue rising at 6.7% in 2023.
The bank's economists also forecast a shorter recession in Britain and a short-lived recession early next year in the U.S. This means the world's largest economy should avoid an outright recession, which is usually defined as two consecutive quarters of GDP contraction.
