RaboResearch - Economic Research

Germany: Gas shortages will make a German recession inevitable

Economic Comment

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  • Germany has moved to the second phase of its national gas emergency plan, just one step shy from the government seizing complete control over the allocation of natural gas
  • German business are already suffering from higher input costs and slowing domestic and foreign demand
  • The labour market on the other hand is still resilient. The unemployment rate has slowly declined and is back at pre-pandemic levels, and meanwhile vacancies have soared and are well above pre-pandemic levels
  • Wage growth is picking up, but is well behind inflation

On June 22 the International Energy Agency wrote that Europe should prepare for a total shutdown of Russian gas exports. The day after, the German Economy minister, Robert Habeck, announced that Germany has moved to the second phase of its national gas emergency plan, just one step shy from the government seizing complete control over the allocation of natural gas, potentially putting energy-intensive and non-essential industry at a complete standstill. And even though gas storage facilities are currently filled around 60%, it is now unlikely that Germany will reach the goal of 90% of capacity by December, since Russia has cut flows through NordStream1 by 60%. German consumers and companies should thus prepare for a cold winter.

Before the war, roughly two-thirds of Germany’s gas imports were (in)directly dependent on Russia. Germany has managed to bring down the Russian import share to 35%, but a halt in Russian gas exports would still leave Germany in deficit. Consequently, Habeck has already announced that Germany will fire up (former) coal plants, whilst he is still reluctant to re-open three nuclear plants that were closed in December 2021. But even re-opening coal or nuclear plants will probably not suffice to dampen the economic impact. Some industries can simply not operate at a profit at the current energy prices.

Figure 1: Germany is relatively dependent on Russian energy…
Figure 1: Germany is relatively dependent on Russian energy…Note: Energy loss is defined as the percentage of the total energy consumption that directly depends on Russia. Source: RaboResearch, Eurostat, 2019
Figure 2: … Since it hardly has any domestic natural gas production
Figure 2: … Since it hardly has any domestic natural gas productionSource: Macrobond, BP

German economy was already losing steam

The impact of a gas shortage on the German economy could be profound. Not only is Germany one of the most industrialized countries in Europe, it’s industry is also relatively energy intensive. But the price impact of higher gas prices will arrive well before any potential gas rationing, and securing electricity and gas contracts has become increasingly hard for German companies. The forward prices for contracts delivering in 2023 and 2024 are significantly higher than the peak rates of December 2021 and February 2022.  

Additionally, German business are already suffering from higher input costs and slowing domestic and foreign demand. In June the manufacturing output index dipped below the neutral mark of 50 points, whilst the overall manufacturing PMI stood at a 23-month low, albeit still at a value indicating moderate growth. The output of goods was still supported by relatively high backlogs, masking an even weaker inflow of new business. New orders actually fell by the greatest extent since June 2020, whilst stocks of finished goods are piling up. The only upside is that average prices rose at a slower rate than in May.  

For services the figures are also downbeat, albeit slightly less negative. Services started off the year with enormous momentum after restrictions were eased, and consumers had built-up pandemic savings and a strong urge to make up for lost consumption. In June, services firms actually saw a marginal drop in new work, indicating that inflation and economic uncertainty are starting to weigh  on demand from consumers and businesses.

The labour market on the other hand is still resilient. The unemployment rate has slowly declined and is back at pre-pandemic levels, and meanwhile vacancies have soared and are well above pre-pandemic levels. Average wage growth has remained rather mute however, with hourly wages up 3.3% YoY in the first quarter, although there seems to be a modest upward trend (which is still insufficient to compensate for the current inflation). We do have to take into account however, that roughly half of 2022 pay rises were negotiated in 2021, when inflation was not top of mind for most. Although we forecast a shallow economic recession, we expect that private consumption will mostly be slowed by dwindling purchasing power, rather than by a higher unemployment rate, since we expect that the high number of vacancies will act as a buffer for the labour market.

Figure 3: Sentiment in German industry seems to be turning
Figure 3: Sentiment in German industry seems to be turningSource: Macrobond, Eurostat, IHS Markit
Figure 4: As does sentiment for the services sector
Figure 4: As does sentiment for the services sectorSource: Macrobond, Eurostat, IHS Markit

So, where next?

Even though the situation regarding the energy security in Germany has deteriorated, we stick to our baseline forecast and expect the German economy to grow by 1.5% in 2022 and to contract by 0.2% in 2023. If the situation were to deteriorate further, and it becomes increasingly likely that Germany will switch to the third stage of the national gas emergency plan, we will change our forecasts for the German economy in line with the scenario study published earlier this year. Needless to say that risks to our current economic projections remain to the downside.

Table 1: Economic forecast Germany
Table 1: Economic forecast GermanySource: RaboResearch
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Author(s)
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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