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December 06
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The economic damage from the disruption of Russian gas supplies is rapidly gaining momentum in Europe and risks eventually surpassing the impact of the global financial crisis, Bloomberg reported.

Now that a continent-wide recession seems inevitable, a harsh winter is coming for chemical manufacturers, steel mills and automakers short of needed raw materials, who have joined households sounding the alarm over skyrocketing energy bills.

Based on a model of the European energy market and economy, Bloomberg Economics' baseline scenario now assumes a 1 percent drop in gross domestic product, with the decline starting in the fourth quarter. If the coming months become particularly cold and the 27 members of the European Union fail to distribute scarce fuel supplies efficiently, the decline could be as much as 5%.

That's about as severe a decline as the 2009 recession. And even if that fate is avoided, the eurozone economy is still on track to spend 2023 in the third-largest recession since World War II, with Germany among the hardest hit.

The grim outlook already means that seven months after the war in Ukraine began, governments are giving hundreds of billions of euros to families while helping companies and talking about energy restrictions. And these rescue efforts may still not work.

Some observers of the energy industry have warned of a long-term crisis that could potentially be more widespread than the oil supply disruptions of the 1970s. Indeed, the final consequences of the shortages could be even worse than economic models might reflect, said Bloomberg's chief European economist, Jamie Rush.

In an energy crisis, the industrial supply chain could break down in the most dramatic and unpredictable way. Individual businesses have a breaking point above which high energy costs simply mean they stop working. Entire industries can face a shortage of energy-intensive resources, such as fertilizer or steel. On the power grid, once a power outage begins, it can quickly spiral out of control, cascading across the grid.

As an example, the experience of Evonik Industries AG, one of the world's largest producers of specialty chemicals based in the industrial valley of the Ruhr in western Germany. In a statement to Bloomberg, the company warned of the potential long-term harm from persistently high costs.

Volkswagen AG, Europe's largest car maker, said last week that it may move production out of Germany and Eastern Europe if natural gas shortages persist. Domo Chemicals Holding NV, which jointly runs Germany's second-largest chemical plant, is cutting production in Europe, while Italian truck maker Iveco Group NV said it is negotiating with suppliers over their struggling energy prices.

Data released just last week showed that private sector activity in the eurozone declined for a third month in September, and the S&P Global Purchasing Managers' Index fell to its lowest level since 2013. Meanwhile, the crisis has also led to a decline in consumer confidence.

For Bloomberg Economics, the baseline scenario, calculated using a set of models combining energy supply, prices and growth, is now that Russian flows are about 10 percent of those seen in 2021. According to Maev's economists, that's already pretty awful.

Their "unlucky" scenario includes even less gas, a cold winter like 2010, and low renewable energy production.

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