Businesses could jump ship in German recession

Berlin, Aug 07: For the fifth month in a row, German factories received fewer orders for their products. In June, orders fell 0.4% compared with May. Though a minor decline at first glance, that adds up to a 5.6% decrease for the second quarter of 2022.

Because of the bottlenecks in global supply chains, German industries still have a high order backlog, but not enough to protect them from the upcoming economic hardship, Commerzbank chief economist Jörg Krämer told DW. "The risk of a recession is increasing," Krämer said.

That sentiment is shared.

The German investment company DekaBank projects a technical recession — a period of significantly reduced economic activity that can last for months. "It is possible that the recession stretches from the fourth quarter of this year into the second quarter of next year," said Andreas Scheuerle, the head of industry analysis at DekaBank.

A decline in industrial output is just a symptom of a difficult economic situation. There are several reasons why German businesses are facing a slump.

'No tight rationing'

The current high inflation rates continue to erode consumer purchasing power. "People can no longer afford to buy as much as they did before and perhaps no longer want to do so," Scheuerle said. There is also great uncertainty as to what additional costs might arise from the high energy prices caused by the war in Ukraine and the gas levy. A report by the Nuremberg Society for Consumer Research (GfK) found the German buying mood diminished as of the end of July.

Additionally, the global economy is suffering, affecting overseas markets. In the United States, one of the most important 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 people and businesses to spend less. The unclear prospect of gas supply is making things more difficult for businesses. "There will probably be no tight rationing this winter," Scheuerle said. But companies might try to reduce their gas consumption by cutting back on production more than they would in a regular winter.

COVID-19 infection rates, too, will likely surge this winter. Scheuerle said Germany was unlikely to introduce lockdowns anymore. However, he said, "you can always expect that a city or port in China will temporarily close." Beijing continues to follow a strict zero-COVID policy, with disruptive effects on supply chains. If an important location in China goes into quarantine, Scheuerle said, the economic impacts might appear the following spring.

Businesses paralyzed by fear of gas prices

German businesses are less confident about the economy and the prospects of growth. Companies are expecting business to become much more difficult in the coming months, according to the Business Climate report, published by the Ifo Institute for Economic Research.

These trends indicate that Germany is facing a "tangible risk of a recession," Krämer said. "After all, Putin keeps playing with the gas tap and fueling the fear of a gas crisis." By doing so, Kremlin wants to demoralize the German public, he added. "This psychological war over gas is unsettling companies and makes them more cautious when ordering," he said. Some customers have canceled or postponed their orders. This would gradually use up the large order backlog that had provided a safety cushion for industries over the past two years.

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

"The German economy could shrink by a maximum of 0.4%," Scheuerle said, adding that the rebound would not be as strong afterward. This is partly because the problem of gas shortage will probably keep challenging businesses until winter. That could push at least parts of German industry to relocate their production abroad — to places where energy is cheaper and produced domestically. The current hurdles may therefore lead to long-term structural changes in the economy.

Source: DW