(Bloomberg) -- European stocks could slump another 10% if Russia cuts off gas to the region, triggering a recession, according to Citigroup Inc. strategists.
“In terms of risk scenarios, a complete gas shutoff remains more likely than a return to 100% pipeline usage,” strategists led by Beata Manthey wrote in a note. A halt of Russian gas supplies could potentially reduce the euro area’s gross domestic product by about 1%, which would imply a 10% contraction in European earnings-per-share over the next 12 months, according to Citi.
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That would lift energy prices and inflation even higher, while forcing energy rationing in the industrial sector and tipping the euro area’s economy into a mild recession, she said. Germany and Italy would be the most negatively impacted, according to Citi.
“An economic slowdown is mostly priced by the market, but a recession is not,” Manthey said. “A European recession triggered by gas shut down from Russia and subsequent 10% EPS contraction could push equity prices c10% lower from current levels.”
The risk that Russia will shut off supplies to the bloc in retaliation for multiple rounds of sanctions has weighed on European assets, adding to a flurry of this year’s investor concerns, including surging inflation, the war in Ukraine and hawkish monetary policy.
Gazprom PJSC has declared force majeure on supplies to several European natural-gas buyers, according to people familiar with the matter, after Russian gas giant had already been curbing shipments to Europe and closed its main Nord Stream pipeline for maintenance earlier this month. Estimates from the European Union show a complete halt of Russian gas supplies could potentially reduce the bloc’s gross domestic product by as much as 1.5%.
Over at Morgan Stanley, economists see a euro-area recession as likely if gas flows resume at or below pre-maintenance levels and forecast inflation peaking at 9.6% in September. If Nord Stream gas flows resume on July 21 at their pre-maintenance levels, European stocks and utilities could gain, according to Morgan Stanley.
“Given market concerns regarding lower or zero gas flow through Nordstream 1, we expect a relief rally due to de-risking of even greater gas supply disruption,” equity and commodity analysts including Robert Pulleyn said in a note.