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European Governments Provide Relief to Mitigate Energy Crisis Impact

Gas and electricity prices have soared to record highs in recent months. This is prompting governments to adopt relief measures to soften the impact on consumers and businesses as winter approaches. In this commentary, we take a look at the government measures adopted in the largest European economies. DBRS Morningstar views some of the factors, including higher energy costs, leading to higher inflation as transitory, but the impact of higher inflation could be more persistent than expected slowing the European economic recovery.

Gas and electricity prices have risen significantly, contributing to the surge in inflation in Europe along other factors. From April to the end of October, the TTF Duch benchmark rose more than 300% and wholesale electricity prices have increased by a range of around 70%-100% year-to-date in major economies. The impact of higher energy prices, on the economies will vary across countries depending on local features, including the mix of energy sources, the pass-through effects, regulations and government measures. In DBRS Morningstar's view a prolonged energy price increase along with less effective government measures could translate into a 2022 Eurozone and UK GDP growth that is 0.3 and 0.4 percentage points lower than otherwise.

Key highlights include:
-- As winter looms, energy inflation could make a dent into consumer spending, although the savings buffer provides protection for some households.
-- Government measures are positive as the speed of recovery is still subject to downside risks.
-- A higher and more persistent rate of inflation weighs on the economic recovery in 2022.

“We view positively European governments’ relief measures as the speed of the economic recovery remains uncertain. Should energy costs remain higher than expected contributing to a higher and more persistent inflation, we expect additional measures in coming months,” notes Carlo Capuano, Vice President in the Global Sovereign Ratings Group. “Those economies where a large share of households opted for regulated contracts are likely to feel a less severe impact, at least initially, but such measures only apply to consumers, and business remain exposed to higher energy prices,” said Cecilia Pierantoni, Vice President in the Structured Credit Group.