For the fifth month in a row, German factories received fewer orders for their products. In June, orders fell 0.4% from May. Although at first glance a minor decline, that adds up to a 5.6% decline for the second quarter of 2022.
Due to bottlenecks in global supply chains, German industries still have a large backlog of orders, but not enough to shield them from looming economic difficulties, Commerzbank chief economist Jörg Krämer told DW. . “The risk of a recession is increasing,” Krämer said.
That feeling is shared.
German investment firm DekaBank projects a technical recession, a period of significantly reduced economic activity that can last for months. “It is possible that the recession will extend from the fourth quarter of this year to the second quarter of next,” said Andreas Scheuerle, head of industry research at DekaBank.
A drop in industrial production is just a symptom of a difficult economic situation. There are several reasons why German companies are facing a recession.
‘No strict rationing’
The current high rates of inflation continue to erode the purchasing power of consumers. “People can’t afford to buy as much as they used to and maybe they don’t want to anymore,” Scheuerle said. There is also great uncertainty about the additional costs that could result from the high energy prices caused by the war in Ukraine and the tax on gas. A report of the Nuremberg Society for Consumer Research (GfK) found that the German buying mood had subsided by the end of July.
In addition, the world economy is suffering, which affects foreign 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, forcing people and companies to spend less.
The unclear outlook for gas supply is making things difficult for companies. “There probably won’t be strict rationing this winter,” Scheuerle said. But companies could try to reduce their gas consumption by cutting production more than they would in a normal winter.
COVID-19 infection rates are also likely to rise this winter. Scheuerle said Germany was unlikely to reintroduce 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 major place in China goes into lockdown, Scheuerle said, the economic impacts could show up the following spring.
Businesses paralyzed for fear of gasoline prices
German companies are less confident in the economy and growth prospects. Companies expect business to become much more difficult in the coming months, according to the Business Climate reportpublished by the Ifo Institute for Economic Research.
These trends indicate that Germany faces a “tangible risk of recession,” Krämer said. “After all, Putin is still playing with the gas tap and fueling fears of a gas crisis.” By doing so, the Kremlin wants to demoralize the German public, he added. “This psychological warfare over gas is unsettling companies and making them more cautious about placing orders,” he said. Some customers have canceled or postponed their orders. This would gradually eat away at the large backlog of orders 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 preceded by the Lehman Brothers bankruptcy or the economic downturn that occurred in the first months of the coronavirus pandemic.
“The German economy could contract by a maximum of 0.4%,” Scheuerle said, adding that the rebound would not be as strong afterwards. This is in part because the gas shortage issue is likely to remain a challenge for companies well into winter.
That could push at least parts of German industry to move production abroad, to places where energy is cheaper and produced domestically. Therefore, the current obstacles may lead to long-term structural changes in the economy.
This article was originally written in German.