Eurozone industry heads into recession led by energy-intensive firms

We expect eurozone industrial production to contract by a cumulative 3% over the next few quarters due to the severe energy crisis. This would represent a moderate industrial recession by historic standards – about in line with the 2018-2019 auto sector crisis and just one-sixth of the pandemic slump. Our forecast rests on several key assumptions and faces downside risks.

What you will learn:

• For now, the downturn is confined to energy- and gas-intensive sectors, where surveys point to a 10%-20% contraction. In contrast, other sectors have remained unusually resilient, which we think is due to import substitution of energy-intensive intermediates.
• In addition, capital goods makers are sitting on an historically high pile of backlogs thanks to the combination of the swift post-pandemic rebound and global supply chain bottlenecks.
• We also think that energy prices, in particular electricity, could ease early next year allowing some firms in the most affected sectors to partially resume production. For one thing, the impact on electricity supply from nuclear power shutdowns in France and a widespread reduction in hydro-electric power due to summer droughts could ease.