Euro area: The European Central Bank FIGURE I-18 (ECB) will continue to tighten despite A European energy crisis recession a. European natural gas prices remain elevated Inflation and the policies enacted to address it   have played a large role in shaping the economic % change ) Europe + % conditions in the euro area. The war in Ukraine h ) W  u added another layer of uncertainty, volatility, M United States +%  t /  MMB and price pressures in 2022. Activity held up well e ( / c $ i  in the first half of the year, supported by a strong r e ( c n p i a r post-pandemic recovery. Growth momentum, e  . p p S o  . r U though, slowed sharply in the second half as u higher energy prices (Figure I-18a), tighter E financial conditions, depressed sentiment, and   January July January July weakening global growth all weighed on the     economy. We expect euro-area GDP growth to Notes: Increase since December 31, 2020. ICE Dutch TTF natural gas price slow from around 3% in 2022 to 0% in 2023. for Europe, and Henry Hub natural gas price for the the U.S. Daily data from January 1, 2021, to November 23, 2022. Looking ahead, we are encouraged by Europe’s Source: Bloomberg, as of November 23, 2022. flexibility in adapting to the sharp reduction in Russian gas imports. Over 90% of its gas storage capacity has been filled, helped by additional b. European gas imports: How the gap will be plugged imports from other pipeline and liquefied natural gas suppliers, and efforts have been made to use  Required reduction in alternative energy sources in some industries. gas consumption = % s  Russia Storage r This should help soften the blow. That said, we e t e Substitution with still expect gas demand to contract by about 15% m other fuels c  this winter relative to last year (Figure I-18b) given ubi Substitution toward c Supply Supply renewables the war-related supply constraints. on li (ex- (ex- Additional supply il B Russia) Russia) from other countries    Sources: International Energy Agency, European Commission, and Vanguard estimates, as of October 31, 2022. 23