For the fifth month in a row, German factories received fewer orders for their products. In June, orders fell by 0.4% compared to May. Although at first glance a small decrease, that amounts to a decrease of 5.6% for the second quarter of 2022.
Due to the bottlenecks in global supply chains, German industries still have a large order backlog, but not enough to protect them from the coming economic hardship, Commerzbank chief economist Jörg Krämer told DW. “The risk of a recession is increasing,” says Krämer.
That feeling is shared.
German investment company DekaBank predicts a technical recession – a period of significantly reduced economic activity that could last for months. “The recession may 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 decline in industrial production is only a symptom of a difficult economic situation. There are several reasons why German companies are facing a slump.
‘No strict rationing’
The current high inflation rates continue to undermine consumer purchasing power. “People can no longer afford to buy as much as they used to and may not want to,” Scheuerle said. There is also great uncertainty about what additional costs may arise from the high energy prices resulting from the war in Ukraine and the gas tax. A report by the Nuremberg Society for Consumer Research (GfK) shows that the German buying mood has declined since the end of July.
In addition, the global economy is suffering, affecting overseas markets. In the United States, one of the main selling destinations for German industry, inflation is so high that the Federal Reserve is raising interest rates much faster than the European Central Bank, forcing people and businesses to spend less.
The unclear prospect of gas supply makes business more difficult. “There probably won’t be tight rationing this winter,” Scheuerle said. But companies can try to reduce their gas consumption by reducing production more than in a normal winter.
The German economy is highly dependent on its industrial production and export of goods
The number of COVID-19 infections is also likely to rise this winter. Scheuerle said it was unlikely that Germany would 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 key location in China goes into quarantine, Scheuerle said, the economic fallout could show up next spring.
Businesses paralyzed by fear of gas prices
German companies are less confident in the economy and growth prospects. According to the Business Climate report from the Ifo Institute for Economic Research, companies expect it to become much more difficult to do business in the coming months.
These trends indicate that Germany faces a “tangible risk of a recession,” Krämer said. “After all, Putin continues to play with the gas tap and feeds the fear of a gas crisis.” By doing so, the Kremlin aims to demoralize the German public, he added. “This psychological war over gas is troubling companies and making them more cautious when ordering,” he said. Some customers have canceled or postponed their orders. This would gradually exhaust the large order book that had provided a safety cushion for industries over the past two years.
A recession seems inevitable. However, it is unlikely to be as severe as the 2008 recession that was preceded by the bankruptcy of Lehman Brothers or the economic downturn that took place in the first months of the coronavirus pandemic.
“The German economy could contract by up to 0.4%,” Scheuerle said, adding that the recovery would not be as strong after that. This is partly because the gas shortage problem is likely to continue to challenge companies until the winter.
At the very least, that could push parts of German industry to move production abroad – to places where energy is cheaper and produced domestically. The current hurdles can therefore lead to long-term structural changes in the economy.
This article was originally written in German.