The Economic Impacts on Germany of a Potential Russian Gas Shutoff

IMF Working Papers, July 19, 2022

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Canonical URL: The Economic Impacts on Germany of a Potential Russian Gas Shutoff

Analysis of a complete and permanent shutoff of the remaining Russian natural gas supplies to Europe, accounting for the curtailment of flows through Nord Stream 1 that has already taken place.
Scenario leads to gas shortages of 9 percent of national consumption in the second half of 2022, 10 percent in 2023 and 4 percent in 2024, with shortages worse in the winter months and likely falling on firms due to legal protections on households.
Combined channels—direct effects of less gas on production, reduced supply of intermediate goods and services to downstream firms, and reduced economic activity due to rising uncertainty—are modeled to assess GDP and inflation impacts.
Simulations indicate the economic impacts can be reduced significantly by households voluntarily sharing a small part of the burden and by rationing gas supplies more to more gas-intensive and downstream firms.
Other measures to enhance German energy security are suggested.

Gas shortages: 9 percent of national consumption in the second half of 2022; 10 percent in 2023; 4 percent in 2024.
GDP relative to baseline: about 1.5 percent lower in 2022; 2.7 percent lower in 2023; 0.4 percent lower in 2024.
Inflation effect: associated rise in wholesale gas prices could increase inflation by about 2 percentage points on average in 2022 and 2023.
No gains in subsequent years from deferred economic activity are projected.

Direct production impact from reduced gas availability to firms.
Indirect impact through reduced supply of intermediate goods and services to downstream firms (production-network effects).
Demand-side impact due to reduced economic activity from rising uncertainty.

Voluntary household sharing of a small part of the gas burden reduces overall economic impact.
Rationing gas supplies more toward less gas-intensive sectors and away from more gas-intensive and downstream firms reduces GDP and inflation costs.
Additional unspecified suggestions to enhance German energy security are recommended.

Prioritize policies that limit economic disruption by targeting rationing toward gas-intensive activities and leveraging voluntary household adjustments.
Strengthen measures that reduce reliance on a single external gas supplier to improve resilience.
Consider coordinated approaches that address supply, distributional burden-sharing, and demand reduction to contain inflationary pressures and output losses.