DM Monitoring
BERLIN: The German economy is contracting already and will likely get worse over the winter months as gas consumption is cut or rationed, the country’s central bank said on Monday.
With Russia, which had supplied about 40% of the European Union’s gas before the Ukraine conflict, shutting the pipeline taking that fuels to Germany, Europe’s largest economy is looking for alternative sources and ways to cut usage.
The Bundesbank said the economy was likely to shrink even if outright rationing is avoided as companies cut or halt production. “Economic activity may pull back somewhat this quarter and shrink markedly in the autumn and winter months,” the central bank said.
It cautioned, however, that it did not expect the adverse scenario it published in June, which saw the economy contracting by 3.2% in 2023, to materialise. Many companies have done just that: reduced production to an absolute minimum or – in the case of the ArcelorMittal steelworks at the ports of Hamburg and Bremen – are planning to shut down “until further notice”.
The scenario is being repeated across Germany, hitting most of all the energy intensive industries – steel, building materials, glass, paper, chemicals – that form the backbone of the German economy.
The “deindustrialisation” which Fahimi fears is what could happen if they close down for good.
Meanwhile, cheaper energy and production costs elsewhere – gas is 10 times cheaper in the US – are driving some businesses to relocate their manufacturing. But in the case of the hundreds of thousands of Mittelstand companies, which are small to medium sized, often family-run concerns and loyal to a specific location which have been Germany’s main growth engine since the second world war – this is barely an option.
According to the Federation of German Industries (BDI), 90% of companies cite the level of energy and raw material costs as either a “strong” or an “existential challenge”. In the case of ammonia – vital to the agricultural industry for the production of fertiliser – producers such as BASF have reduced their production to a minimum and been forced to buy the chemical from cheaper markets elsewhere in the world.
Volker Jung, the head of the bankrupt Hakle toilet paper firm, has called for a state supported energy price cap “otherwise,” he said, “we can ask the question whether Germany will ever be able to afford to make paper again.”
Wolfgang Große Entrup, the head of the German Chemical Association (VCI), has warned of the risk of Germany developing new dependencies at a time when it should be looking to do the opposite.
Another recent survey has shown consumer confidence to be at its lowest since the founding of the Federal Republic of Germany in 1949. Faced with higher energy bills, households are rethinking spending, from holidays to household purchases and meals out.
Businesses are doing the same, avoiding new investments and instead holding crisis meetings about how low they can reduce heating in factories and offices.
Increasing numbers of companies are switching their workers into “Kurzarbeit” – short-time working mode – which was first introduced in the 1920s in response to the economic crisis of the Weimar Republic, and later utilised to considerable effect during the global financial crisis.
This willingness to cling on to workers is seen as crucial if Germany stands a chance of emerging from the current crisis. But increasingly the question is being asked: how long will it be able to afford to do so?
