Today has seen something of a change as the Financial Times seems to have caught up with at least part of our view on economic prospects for Germany. It has taken them quite some time as the issue in my view began in 2018, although as it came from later downwards revisions to economic growth it was not clear until early 2019. Then there was the issue of how an exporting economy dealt with the trade ricochets of the policies of President Trump? Since then we have had Covid and an energy crisis plus more recently the issue of drought.
So what does the FT think?
Christian Lindner, Germany’s finance minister, didn’t pull his punches in describing the grim new reality facing Europe’s largest economy.
The country’s prospects had become “fragile”, he said on Wednesday. Growth forecasts were being downgraded. Life had become “much more expensive for lots of people”, with rising prices for gas, energy and food.
We looked at the inflation issue only yesterday with it being 8.5% on the Euro area measure so the cost of living crisis is in full force there too. Speaking of the cost of living the official figures ignore the cost of owner-occupied housing so let me help out.
The overall index increased slightly by 0.25 percent in May and reached 224.71 index points. Overall, the overall index has risen by 12.73 percent over the past year. ( Europace )
The Energy Crisis
This is hitting Germany in various ways of which the more recent is the impact of the drought affecting much of Europe.
According to the Federal Waterways and Shipping Administration, the water level in Kaub near Koblenz will reach the critical depth of 40 centimeters in the early morning of August 12 and drop to 38 centimeters during the course of the day. At this level, barges can no longer navigate the river. 37 centimeters are predicted for the following day. ( FAZ )
This impacts on the energy area as well.
The Rhine, Europe’s most important river, plays a key role in helping transport more coal to German power plants to help offset the impact of Russia’s squeeze on gas supplies. But Chancellor Olaf Scholz’s administration is concerned shipping snarls could undermine plans to revive some mothballed facilities, according to people familiar with the situation. ( Bloomberg)
The situation is not being helped by the drought impacting elsewhere as this last week from Javier Blas highlights.
EdF says it’s likely to power down some of its nuclear reactors on the Rhône and Garonne rivers due to low water levels (the water is used for cooling). This is going to exacerbate the nuclear electricity crisis in France.
With the grids relying on each other to an increasing extent it is no great surprise we are seeing this as a result.
And another day, another electricity record high: France 1-year forward power €576 per MWh
German 1-year forward power €430 per MWh
(For context, the 2010-2020 average is ~€45 per MWh)
Gas too as Javier completes the set.
Oh, and European TTF natural gas benchmark closed the day at €205.3 per MWh, the highest settlement price since March 8th. In the forward market, TTF Cal-23 and Cal-24 settled at all-time high for those contracts.
Back to the wider economy
It must be extremely painful for the Financial Times to have to type this.
The eurozone’s powerhouse has become its weak link. Germany’s economy stagnated between the first and second quarters, while the single currency area as a whole grew by 0.7 per cent. Last month the IMF slashed its forecast for German growth in 2023 by 1.9 percentage points to 0.8 per cent, the biggest downgrade of any country.
I have very little faith in IMF forecasts ( think the Greek crisis) but even they can see there is trouble ahead. Also if we think of Greece it may have the opportunity to send back some of the messages it received from Germany over the past decade.
While Italy, Spain and France recorded stronger than expected growth on the back of a tourism-fuelled boom, Germany has had to rely more on domestic demand. But with consumers labouring under high inflation, spending and confidence are fragile. Retail sales fell 8.8 per cent compared with a year previously — the biggest decline on record.
So as we mull the idea of Germany getting a taste of its own medicine there is an echo of what we looked at yesterday. I did point out that Germany has been considered to have deficient domestic and it is doing the reverse of getting better. Also it is kind of the German statistics office to reinforce the link I first made between inflation and retail sales back in January 2015 and the emphasis is mine.
In comparison compared to June 2021, the retail trade recorded a real 8.8% drop in sales in June 2022. This is the largest decline compared to the same month last year since the time series began in 1994. Nominally, sales only fell by 0.8%. The difference between the nominal and real results reflects the high price increases in retail, which are having a noticeable impact on consumer confidence.
Industry
Some sectors are having a very difficult time according to the FT.
An even bigger problem is the increase in energy prices. Hans Jürgen Kerkhoff, president of the German Steel Federation, said the steel industry was incurring additional costs of about €7bn a year, compared with 2021, as gas and electricity bills rose. Government plans to impose a levy on gas consumers to help struggling gas supply companies “would add another billion”, the group said.
It is hard to see how that be economic on two counts. Firstly there are producers around the world with cheaper energy costs and secondly there will be some customers who will be unable to pay the new higher price for steel.
Anyway I am a little unclear how this bit works.
The German government is not too alarmed by the downbeat statistics. “A lot of companies are telling us that even if they get no new orders they’ll still be busy for the next two years,” said one official.
Then he seems to morph into a latter-day Dr. Pangloss.
A recession is still a possibility, he said, but it could “be a soft one — where growth is below zero for two quarters, but everything feels OK, companies can pay their bills and we can help everyone through the winter”.
Comment
There is much that is pressing down on the German economy at the moment. Looking ahead there are more and more scenarios that have some and maybe much of its production being rationed this winter. This can happen explicitly via power cuts but there is an even higher risk of rationing via the fact that energy prices will be too high to make production economic.
At the moment some parts of the German economy are holding in there. It looked as though trade had turned against it but the latest figures are below.
WIESBADEN – In June 2022, German exports increased by 4.5% and imports by 0.2% compared to May 2022 after calendar and seasonal adjustment.
Also the deficit in May has been revised away.
In May 2022, the calendar and seasonally adjusted balance of the foreign trade statistics was +0.8 billion euros,
However can that continue.
As a final point I note that referring to the Rhine drought puts you in the “Pessimists” category according to the FT when the drought is a fact. Oh and the minister quoted at the beginning was planning this.
The inland navigation association has not heard any encouraging signals from the current government: Federal Finance Minister Christian Lindner (FDP) has planned a reduction in the waterway budget by around 360 million euros from 2023, says BDB Managing Director Jens Schwanen. ( FAZ )