Eurozone consumers in for a shock as power bills soar

FRANKFURT, Germany – When Christian Hurtz opened his electricity bill just before New Year, his jaw dropped: it had more than trebled from the rate he signed up for.

The 41-year-old software developer from Cologne, Germany, is one of millions of Europeans who have seen their energy costs balloon as providers go out of business because of soaring gas prices or pass them on to customers.

Spending more on heating, lighting, or running a car is straining many households’ budgets and shaking expectations that a consumer-led economic boom will follow pandemic-era restraint.

“At first I thought that was the amount for three months,” said Hurtz, whose bill came from the provider of last resort after his own energy company stopped supplying.

“When I realized they wanted it every single month, my jaw dropped. It spoiled my Christmas break a bit,” he told Reuters.

In 2020, eurozone households spent an average of 1,200 euros on electricity and gas. That figure is set to swell to 1,850 euros this year, according to analysts at BofA, as geopolitical tensions push up natural gas prices which the scarce supply of energy from renewable sources cannot offset.

Hurtz and hundreds of thousands of other customers of private energy firms that went out of business or stopped supply last year – including 39 in Germany alone – have found themselves paying two or three times the rates they thought they had secured.

Consumer boom?

This year was meant to see consumer spending drive growth after two years of COVID-19 lockdowns and layoffs.

The European Central Bank said in December it expected the eurozone economy to expand by 4.2% in 2022, driven by a 5.9% surge in private consumption.

But higher energy costs hitting households at home and at the gasoline pump – with oil rising by half and wholesale prices for natural gas quadrupling in a year – are throwing those forecasts into question.

Energy typically accounts for slightly more than 6% of private consumption in the eurozone but this could rise to 8% to 10% as a result of higher prices, according to ING’s estimates, reducing what is available to spend on other goods.

“This would also be in line with previous episodes of higher energy prices, in which almost all countries saw other expenditures dropping,” ING’s economist Carsten Brzeski said.

The hit to growth is likely to be significant.

In Italy, for example, gas and electricity prices will shave 2.9% off household consumption this year and 1.1% off gross domestic product (GDP) if they stay close to their current levels, according to consultancy firm Nomisma Energia.

“The weakness of Italian consumption has always been one of the main impediments for stronger GDP growth and 2022 levels will further worsen the problems,” Nomisma Energia’s chairman Davide Tabarelli said.

The picture is even more severe in Spain, where economists at BBVA put the hit to growth at 1.4% for this year in estimates published in December and based on market prices that are below current levels.

“If price increases come from higher demand, they are less damaging,” Miguel Cardoso of BBVA Research said. “The current situation is not like that. We are seeing a negative supply shock.”

In Germany, the RWI Institute estimated consumer spending would probably not exceed pre-crisis levels again until the second quarter of 2022 and said rising prices were likely to deter people from making major purchases.

France was a partial exception as the government of President Emmanuel Macron, who is seeking reelection in May, has capped electricity price increases at 4%.

Other governments too are taking steps ranging from cutting taxes on energy to giving subsidies to poorer households.

But these will offset only about a quarter of the 54% increase in energy bills from 2020, according to BofA estimates.

Some people have already started tightening their belts.

“One must really cut down,” Hurtz said. “It’s come to the point when one needs to wonder if they can still afford that cheese or if they should buy one from the lower shelf.” – Rappler.com