- Germany’s economy, the largest in Europe, has a large industrial sector under enormous pressure.
- Factory inflation has just hit its highest level since records began in 1949, as electricity costs soared 600%.
Germany, Europe’s largest economy, is struggling with its dependence on Russian energy. It’s in the midst of a crippling energy crisis that has driven inflation up and pushed the country into recession.
Electricity prices in Germany skyrockets more than 600% in the year to July due to soaring natural gas prices, putting pressure on businesses and consumers.
Producer price inflation – a measure of the prices manufacturers charge when goods leave their factories and a leading indicator of consumer price inflation – jumped to 37.2% during the year through July, the biggest increase since records began in 1949, official data showed Last week.
The German economy stagnated in the second quarter of 2022 and many forecasters expect an imminent recession.
Here’s what happens.
Germany has long looked to Russia for oil and natural gas. Even at the height of the Cold War, the Soviet Union sent a reliable supply of energy west to Germany.
In 2019, Germany imported 71% of its energywith about half of its natural gas imports and a third of its oil coming from Russia.
Then, at the end of February, Russia invaded Ukraine.
As diplomatic relations between Russia and the West deteriorated, Moscow cut its supply of natural gas via the crucial Nord Stream 1 pipeline to Germany, only 20% of capacity, driving up energy prices.
The European Union’s complex energy pricing system means electricity prices have followed suit, reaching record highs almost daily.
“Germany is more vulnerable than most European countries to rising gas prices,” Andrew Kenningham, chief economist for Europe at Capital Economics, told Insider. “It’s in turn because it has quite a large industrial sector.”
The country’s large chemical and metallurgical sectors are big consumers of natural gas and have seen their costs soar as a result. For example, the cost of manufacturing fertilizers in Germany more than doubled in the year to July.
Adding to the energy crisis, heat waves across Europe have undermined water levels on the Rhine, disrupting navigation on a crucial transport artery for German factories. Germany’s manufacturing sector contracted in June and July, according to preliminary survey data released by S&P Global on Tuesday.
And like all eurozone economies, Germany is grappling with rising interest rates as the European Central Bank tries to tackle soaring inflation.
S&P economist Phil Smith said weakness in the manufacturing sector was “compounded by a slowdown in the services sector, with companies surveyed reporting growing pressure on demand from high inflation and a ‘an increase in interest rates’.
The German economy stagnated in the second quarter and economists expect things to get worse.
“We’ve been anticipating a recession for some time,” Capital Economics’ Kenningham said, adding that he expects the German economy to contract in the fourth quarter of 2022 and the first quarter of 2023. to: How deep is a recession?”
The German central bank now anticipates inflation increase from 8.5% in July to more than 10% — which would be the highest level since the early 1950s.
A slowdown in the German economy is bad news for its European neighbours. Still, analysts say the likelihood of a full-scale economic and financial crisis rocking the eurozone, on par with the early 2010s, remains slim.
On the one hand, Kenningham said, the ECB is now well practiced in managing economic downturns through emergency measures such as bond purchases.
For Germany, however, the future is less rosy. The industrial powerhouse of Europe is collapsing.