Energy costs in Europe as a percentage of GDP double signaling a persistent headwind

European households seem to be bracing for a cold and expensive winter due to the worsening energy crisis that is likely to persist through the winter months. With the Russian oil and gas embargo due to the invasion of Ukraine, Europan gas prices have skyrocketed eight times higher than average. 

Meanwhile, governments have allocated roughly $276 billion to try and soften the blow of the rising energy sector on household budgets. This government spending has been picked up by the director of Heimstaden, Andreas Steno Larsen, who took to Twitter on September 19, to share energy costs as a percentage of gross domestic product (GDP).

“This is probably the scariest chart I have produced this year. Energy costs as a % of GDP in 2020, 2021 and 2022 in Europe (and the world average)”

Hurting growth 

High energy costs are making inflation issues in Europe much worse than they should, creating a vicious cycle where growth expectations will have to come down. Some governments were forced into bailout mode for energy companies, such as in Germany with the $15 billion bailout of Uniper, a utility firm.  

Meanwhile, gas plays a crucial role in the European economy, used for heating homes, heavy industry, and marginally for electricity creation. As things stand at the moment, markets moved in such a manner as to price constantly high gas prices into 2023 and 2024. 

Moreover, consumer demand in the EU is already being hit by high energy prices, capacity constraints, and tight labor markets. Constantly high energy prices could be a continuous and major headwind for consumer demand and growth in Europe. 

Fiscal rescue 

After the fiscal rescue seen during the pandemic years, governments are now sporting higher deficits and debt levels, limiting the fiscal capabilities of EU countries. Comprehensive fiscal solutions like the ones seen during the pandemic could potentially backfire, increasing inflation. 

As the war in Ukraine drags on, it seems more likely that a recession could hit Europe in 2023 if energy prices, inflation, and tight labor markets continue. 

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