Germany is 'on the cusp of a recession' due to Russia's natural-gas squeeze and energy inflation

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German Chancellor Olaf Scholz's administration is dealing with an unprecedented energy crisis.
  • German business confidence has fallen to its lowest level since June 2020 amid the pandemic.
  • Market sentiment is hit by slowing natural-gas flows from Russia and energy inflation.
  • Russia said it's cutting natural-gas flows to Europe again from Wednesday due to an equipment issue.
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German business confidence has slumped and the country is on the brink of a recession, according to the Ifo Institute, a Munich-based think tank.

That's as the institute's Business Climate Index fell to 88.6 in July — its lowest level since June 2020. The measure of business sentiment stood at 92.2 in June. It's based on a survey of 9,000 managers across German businesses.

Clemens Fuest, the president of the Ifo Institute, said the threat of a gas shortage and high energy prices are weighing on Europe's largest economy.

"Companies are expecting business to become much more difficult in the coming months. They were also less satisfied with their current situation," Fuest said in a statement on Monday. "Germany is on the cusp of a recession."

Results of the survey, released on Monday, came just as Russian state gas giant Gazprom said it will be slashing natural-gas flows to Europe to 20% of Nord Stream 1's capacity from Wednesday. Russia restarted the pipeline on Thursday after a 10-day scheduled maintenance, keeping gas flows to 40% of capacity — which was already lower than before.

Gazprom said on Monday it was cutting natural-gas flows again this week due to an equipment issue, but the German economy ministry said "there is no technical reason" for the reduction. The news sent benchmark European gas futures up as much as 10% on Monday alone, extending sharp gains that have already more than doubled prices year-to-date.

The developments put pressure on Europe, which is already fretting over a natural-gas shortage this winter. It depends on Russia for 40% of its total natural-gas needs, from cooking in homes to firing power stations. Most of the fuel to Europe is delivered via pipeline.

"The Ifo business climate index, like the purchasing managers' index, now clearly points to a downturn in the German economy," said Jorge Kraemer, an economic analyst at Commerzbank. "How bad it ends up, unfortunately, lies mainly in Putin hands."

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