An embargo on Russian gas imports triggered by a further escalation of the war in Ukraine could plunge Germany into a recession, the Bundesbank warned on Friday, but Europe’s largest economy would probably shrink less severely than during the first year of the coronavirus pandemic.
An immediate EU ban on Russian gas would cost Germany the equivalent of €165bn (£138bn) in lost output this year, according to the country’s central bank.
“In the severe crisis scenario, real GDP in the current year would fall by almost 2% compared to 2021,” the Bundesbank said in its latest monthly report.
Germany’s manufacturing-heavy economy would feel the painful consequences of gas-shortages for the coming years, the bank’s report said. “In addition, the inflation rate would be significantly higher for a longer period of time.”
Before the start of the war in Ukraine, Russian natural gas accounted for 55% of Germany’s gas needs, with roughly a third used for industrial production, including steel and chemicals.
“Natural gas prices are likely to rise the most, as Russian deliveries are difficult to replace in the short term,” the bank said.
However, in a heated German debate over the economic price the country should be prepared to pay to help cut off financial support for Putin’s war economy, some have taken the Bundesbank report as positive news.
“The economic slump would with high probability be less severe than during the corona crisis,” wrote conservative broadsheet Frankfurter Allgemeine Zeitung. “It puts even more pressure on the government to justify itself”.
Germany’s GDP slumped by 4.6% in the first year of the pandemic, with a sharp recession ending a 10-year run of growth. The German economy recovered in 2021, growing by 2.9%.
While the European Union has already banned Russian coal and is preparing an embargo on its oil, plans for a gas boycott have stalled in part due to the concerns of Germany, which has warned that a recession on its own terrain could have devastating knock-on effects across the European Union.
Germany’s economy minister, Robert Habeck, has predicted “mass unemployment, poverty, people who can’t heat their homes, people who run out of petrol” if his country stopped using Russian oil and gas.
Critics say the German government’s fears are based on political gut instincts and doomsday warnings of industrial lobbyists rather than concrete economic models.