Ship part

If Germany falls into recession, companies could jump ship | Germany | In-depth news and reporting from Berlin and beyond | DW

For the fifth consecutive month, German factories received fewer orders for their products. In June, orders fell 0.4% from May. Although this is a minor decline at first glance, this represents a decline of 5.6% for the second quarter of 2022.

Due to bottlenecks in global supply chains, German industries still have a high order book, but not enough to protect them from the economic difficulties ahead, Commerzbank’s chief economist told DW. , Jörg Kramer. “The risk of a recession is increasing,” Krämer said.

This feeling is shared.

German investment firm DekaBank predicts a technical recession – a period of significantly reduced economic activity that can last for months. “It is possible that the recession will extend from the fourth quarter of this year to the second quarter of next year,” said Andreas Scheuerle, head of sector analysis at DekaBank.

A fall in industrial production is only the symptom of a difficult economic situation. There are several reasons why German companies are facing a slump.

“No tight rationing”

Current high inflation rates continue to erode consumers’ purchasing power. “People can’t afford to buy as much as they used to and maybe don’t want to,” Scheuerle said. There is also great uncertainty about the additional costs that could result from high energy prices caused by the war in Ukraine and the gas tax. A Nuremberg Society for Consumer Research (GfK) report found that the buying mood of Germans had weakened at the end of July.

Additionally, the global economy is suffering, affecting foreign markets. In the United States, one of the main sales destinations for German industry, inflation rates are so high that the Federal Reserve is raising interest rates much faster than the European Central Bank, pushing individuals and businesses to spend less.
The unclear gas supply outlook is making things more difficult for businesses. “There probably won’t be tight rationing this winter,” Scheuerle said. But companies could try to reduce their gas consumption by cutting production more than they would in a normal winter.

The German economy is highly dependent on its industrial production and exports of goods

COVID-19 infection rates will also likely increase this winter. Scheuerle said Germany was unlikely to introduce more lockdowns. However, he said, “you can always expect a city or port in China to close temporarily.” Beijing continues to follow a strict zero COVID policy, with disruptive effects on supply chains. If a major location in China goes into quarantine, Scheuerle said, the economic impacts could show up the following spring.

Businesses paralyzed by fear of gas prices

German companies are less confident in the economy and growth prospects. Companies expect business to get much tougher in the coming months, according to business climate reportpublished by the Ifo Institute for Economic Research.

These trends indicate that Germany faces a “tangible risk of recession”, Krämer said. “After all, Putin keeps fiddling with the gas tap and fueling the fear of a gas crisis.” By doing so, the Kremlin wants to demoralize the German public, he added. “This psychological warfare around gas is confusing businesses and making them more cautious when ordering,” he said. Some customers have canceled or postponed their orders. This would gradually deplete the large order book that had provided a cushion to industries over the past two years.

A recession seems inevitable. However, it is unlikely to be as severe as the 2008 recession preceded by the bankruptcy of Lehman Brothers or the economic downturn that occurred in first months of the coronavirus pandemic.

“The German economy could contract by a maximum of 0.4%,” Scheuerle said, adding that the rebound would not be as strong thereafter. That’s partly because the gas shortage issue will likely continue to challenge businesses well into winter.
This could push at least some parts of German industry to relocate production overseas – to places where energy is cheaper and produced locally. Current obstacles could therefore lead to long-term structural changes in the economy.

This article was originally written in German.