Germany’s leading economic index, the ZEW, collapsed in July as fears mount that Russia will cut the country off from gas entirely at the end of this month, and that could spark a major economic crisis, Oxford Economics reported on July 12.

Soaring inflation and sky-high energy prices have already kicked the wind out of Europe’s growth. The World Bank has downgraded the global growth outlook several times this year already and issued a harsh warning of the looming dangers of stagflation in June that could tip the world into recession this year. The respected Bloomberg forecast put the chances of recession this year at 38% and 75% next year. Commodity prices have recently come off their crisis-inspired highs and fallen dramatically as concerns switch to dealing with a recession.

The ZEW index added to those worries by tumbling in July. The assessment of current conditions dropped 18.2pts over the month to -45.8, but the expectations sub-index fell even more, falling 25.8pts to -53.8, beating March 2020's trough and indicating that investors are gravely worried about the current constellation of risks, not least a cut-off from the Russian gas supply, Oxford Economics said in a note.

Fears of a gas crisis became real in mid-June when Gazprom reduced flows of gas to Europe by 60%. Russia has already cut off four countries from gas deliveries for their refusal to join its gas-for-rubles scheme introduced by presidential decree in May. And on July 11 gas supplies were reduced even further after the Nord Stream 1 pipeline was taken offline for its annual 10 days of maintenance work. Analysts and governments are worried that Russia will not turn it back on July 21 when that work ends, or at least will resume pumping gas at even lower volumes than before the shutdown started, as reported by bne IntelliNews in “How many days of gas consumption are in Europe’s storage tanks?”

Germany is the most reliant on Russian gas but an embargo will affect everyone. The ZEW indices for the rest of the eurozone paint a similar picture, with both subcomponents falling markedly for all countries included in the index.

“The reading joins the string of unfavourable survey results published recently, which are consistently pointing to a rapidly worsening stance of the bloc's economy and, even more so, its prospects for the coming quarters. Accordingly, we will be trimming our forecast for the eurozone's GDP growth this year, with the new set of forecasts to be published tomorrow,” said Mateusz Urban, an economist with Oxford Economics.

The ZEW results mirror the majority of forecasts and other indices published recently that all point downwards, and the index is at its lowest level since April 2021.

“Investors' assessments of the current conditions are in line with the growing pile of evidence pointing to a softening of demand – affecting both industry and some services, amid elevated inflation weighing on households' budgets and sentiment,” says Urban.

“But it is the sharp deterioration in expectations that is even more eye-catching. Indeed, the assessment of the six-month outlook for the German economy collapsed by 25.8pts to -53.8, a level lower even than the pandemic trough of -49.5,” Urban adds. “The picture was broadly similar at the eurozone level, with the expectations sub-index falling to -51.1. But this is unsurprising, given the rising odds of a potential cut-off of the Russian gas and the associated need for rationing. The consequences of such a scenario would be dire, resulting in an annual gross value added (GVA) loss of 1.5%-4%, depending on the particular country's exposure to the Russian gas.”