Deutsche Bank says it now expects a ‘longer and deeper’ recession in Europe

Deutsche Bank’s economists argued their previous prediction for a “mild recession” in Europe is no longer valid as the energy crisis has worsened substantially since July.

“The baseline call we made in July for a mild recession this winter is now too benign,” the investment bank’s chief economist for Europe, Mark Wall, said in a research note. “We now foresee a longer and deeper recession.”

Wall and his team expect real gross domestic product (GDP) in the euro area to drop roughly 3% year-over-year between mid-2022 and mid-2023. But they also admit that an “even sharper winter downturn cannot be ruled out.”

In many places in Europe, the cost of electricity has risen so much that factories have been forced to shut down. Spanish Prime Minister Pedro Sánchez even told reporters this week that Europe’s energy market simply “doesn’t function” amid warnings from Goldman Sachs that European household electrical bills could surge by $2 trillion over the coming year.

E.U. member states have responded to the crisis with $496 billion in programs meant to help alleviate the high prices the public would otherwise pay, new data from the German think tank Bruegel shows. And Germany even nationalized the utility company Uniper this week in hopes of securing enough energy supplies for winter.

But Deutsche Bank’s Wall argues the efforts won’t be enough to avoid economic disaster.

The chief economist notes that the Nord Stream 1 pipeline, which carries Russian natural gas into Europe, is now closed “indefinitely,” and he argues that there are “elevated risks” that the Russia-Ukraine war will escalate further.

“That may well result in the remaining supplies of gas from Russia being disrupted,” Wall wrote, adding that recent developments have added to inflation and reduced economic growth in Europe.

Wall also explained that “colder-than-usual weather” or increased supply chain shortages triggered by factory shutdowns in Europe could lead to an even worse recession for Europe.

“The situation has deteriorated,” he concluded.