Bank of Spain sees EU GDP hit by up to 4.2%

A potential halt of energy imports from Russia would have a negative short-term economic impact of eroding gross domestic product for the European Union as a whole by between 2.5per cent and 4.2per cent, Spain's central bank said on Tuesday.

The Bank of Spain said in an analytical report that the magnitude of the estimated impact in the first year of trade suspension should later diminish, reflecting Europe's increasing adaptability in replacing Russian imports.

The economic brunt would be significantly greater in the three largest euro area economies - Germany, Italy and France - and in Eastern European countries, due to their higher reliance on Russian energy supplies, the report said.

For Germany, there would be an estimated drop in activity of between 1.9per cent and 3.4per cent of GDP, 2.3per cent-3.9per cent for Italy, 1.2per cent-2per cent for France, and between 0.8per cent and 1.4per cent for Spain, said Javier Quintana, research economist from the Bank of Spain.

European Union leaders agreed in principle on Monday to cut 90per cent of oil imports from Russia by the end of this year.

In Germany, the issue has been the subject of increasing debate given its relatively high energy dependence
on Russia.

For the EU as a whole, there would also be an increase of between 1.6 and 2.7 percentage points in the inflation rate, the report said, projecting an additional 0.8-1.2 percentage points for Spain.

Euro zone inflation rose to yet another record high of 8.1per cent year-on-year in May.

These projections, subject to enormous geopolitical uncertainty, are based on a hypothetical halt of all supplies of energy commodities from Russia.

The suspension of imports of oil products would have a lower impact than the disruption of inflow of Russian natural gas and coal, it said.

A hypothetical halt of the remaining trade flows with Russia would have an additional negative effect on European economies, although its magnitude would be substantially smaller than that from energy raw materials.