Europe will spiral into a severe recession as the energy crisis hikes inflation and weighs on GDP, BlackRock says

Philipp von Ditfurth/Getty Images

• Europe's worsening energy crisis will send the continent into a severe recession, BlackRock said.
• Soaring energy prices have worsened inflation, leading to aggressive rate hikes from the European Central Bank.
• But that hawkishness is set to squash economic growth, which markets haven't fully priced in yet.

Europe will spiral into a severe recession, as the shortage in energy supplies is set to spike inflation even higher and weigh heavily on Europe's GDP, BlackRock said in a note on Monday.

"The energy crunch will drive a recession in Europe, as we've argued since March. The crisis has worsened since then as Russia has halted gas supplies," analysts warned, pointing to the indefinite cutoff of flows from Russia's Nord Stream 1 pipeline. 

Eurozone inflation reached 9.1% in August, causing the European Central Bank to issue its first-ever 75-point rate hike last week to control prices.

But that level of monetary tightening threatens to squash Europe's economic activity, which is already under pressure from the energy crisis. Energy spending currently accounts for 11.7% of the EU's GDP, compared to just 5.3% in the US. 

"The European Central Bank isn't acknowledging how it will crush activity further by trying to fight high inflation, in our view. We think the ECB will wake up to this sooner than markets expect – but not before it inevitably faces a severe recession," BlackRock said.

Analysts expect it to remain hawkish through the end of the year and said the ECB's downside scenario of a 0.9% contraction in the economy is looking more likely, which European stocks haven't fully priced in yet.

Experts are also expecting the worst of the energy crisis to hit Europe this winter, as heating demand will put more pressure on the supply shortage and send prices even higher.

Although the EU has built up gas reserves to more than 80% of capacity, the 27-country bloc is still struggling to ration supplies ahead of winter, and some European nations have never relied on reserves alone through the winter without additional gas flows.