Page 31 - bne monthly magazine October 2022

bne October 2022 Cover story I 31
In Hungary the government abandoned its price cap on household utility prices last month that had been in place since 2014, as it was proving too costly. It is now charging higher prices for above-average consumption, although it still estimates that keeping price caps partially in place will cost around €5bn this year (3.0% of GDP). All told, governments are provid- ing support to counter high energy prices which totals around 2-3% of GDP, Capital Economics said in a note.
“These fiscal interventions will provide support to economic activity, but they won’t completely mitigate the effect
of extremely elevated prices. Based on calculations we published earlier this week, which assume a full pass-through of wholesale energy prices to consumer prices, household spending on energy would rise by more than 3% of GDP across most of the region between 2021 and 2023. That rise is more than the total offsetting fiscal support govern- ments have announced for both house- holds and businesses,” Nicholas Farr,
the Emerging Europe economist for Capital Economics, said in a note.
More and more government are looking at capping energy prices. An attempt
to impose a Europe-wide cap on gas prices already seems to have fallen at the first fence but plans at national level are proliferating. Last week the Polish government set out more plans to freeze electricity prices in 2023 up
to certain consumption levels, while Czechia’s government said it intends to cap electricity and gas prices from November. Romania has introduced
a tax on the sector to offset the cost
of its price caps, and Czechia’s plan to cap utility prices is part-funded by a windfall tax on energy companies. EU member states will discuss a similar bloc-wide tax later in September.
“Even so, if energy prices surge further or stay high for a prolonged period, some governments may still find
it difficult to maintain or increase support,” says Farr.
A deep recession seems inevitable now. Eurozone industrial production slipped into the black in July after three months of expansion with a 2.3% fall – far worse than consensus expectations of a 1% drop. Three of the big four economies posted monthly declines in a sign that the industrial outlook was deteriorating markedly as Europe's energy crisis is visibly taking its toll on industry.
“Further contractions in industrial output are to be expected as wholesale gas
and electricity prices remain higher for longer, leading to demand destruction. Less government support for industry compared to households over winter will also weigh on output. We expect euro- zone industry and GDP to enter a reces- sion from Q3 and ending in Q1 next year,” Oxford Economics said in a note. “The GDP recession should be shallow, with activity gradually picking up over 2023 as inflation starts to ease and the ECB stops hiking. Nevertheless, the severe escala- tion in Europe's energy crisis means GDP growth will be flat next year.”
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