German Economic Engine Falters

  

For Lithuania, which is attached to the German economy, tragedy. Good thing we have the Landsbergis' family, they will conquer Siberia for us. No worries. They will take us there again in cattle cars. How nice to have someone else make the decisions for you.

"Germany's economy hasn't grown for nearly five years. Its recovery from the Covid-19 pandemic has been weaker than any major advanced economy. Its ability to fill its energy needs is in question. And now the country once known as the economic engine of Europe is teetering on the brink of a recession.

It's a sharp turn of fortunes for Germany's large manufacturing sector, which flourished over the past two decades just as other Western nations saw industrial jobs migrate to Asia.

Germany's big and long-successful bet on manufacturing relied on four engines: Free and open global trade, surging demand from China, an efficient domestic workforce and cheap Russian energy. Each of those is now sputtering.

Trade bottlenecks, the Covid-19 pandemic and the sanctions on Russia have upended supply chains and caused prices to skyrocket.

Growth in China, Germany's largest trading partner, has slowed dramatically, as its workforce ages and starts to shrink, and it reaches the limits of investment-driven growth.

Germany's own workforce is expected to shrink by about five million over the next decade as the population ages.

The country's energy crisis deepened Wednesday, when Russia slashed the natural gas that flows to Western Europe through its Nord Stream pipeline because of sanctioned equipment.

Germany has for decades promoted Russian oil and gas, creating cost savings but also a risky dependence. Until recently, Russian imports made up over 55% of the country's gas consumption, 50% of its coal consumption and 35% of its oil consumption.

Those shares have declined this year as the country scrambles to find other suppliers and renew domestic energy infrastructure.

Russia's throttling of natural-gas deliveries and Western sanctions against Moscow have also sent up prices for electricity, oil and coal. Berlin has drafted plans to ration supplies to manufacturers. It has already taken steps such as substituting coal for gas for power generation and creating financial incentives for companies to conserve.

Nearly one in six industrial firms in Germany is reducing or abandoning production in response to high energy prices, according to a survey published in late July by the Association of German Chambers of Industry and Commerce, or DIHK.

"These are alarming numbers," said DIHK President Peter Adrian, saying many companies are finding they can't sufficiently pass on the price increases to customers.

Heinz-Glas, a 400-year-old glass manufacturer based in Bavaria, makes one in four of the world's perfume bottles. Its clients include Estee Lauder Cos. and L'Oreal SA. It said it could be forced to move its manufacturing abroad, where labor is more plentiful and energy is cheaper.

The company, with about 1,500 staff in Germany, is heavily reliant on natural gas from Russia: Glass production requires temperatures of around 3,000 degrees Fahrenheit. Without a steady gas supply, the company's melting furnaces -- costing more than 10 million euros each -- would cool down and be severely damaged.

The company is paying up to 10 times the price it paid for energy before the sanctions on Russia, said Frank Martin, chief financial officer. "Our competitors are in France, they are in South America. They aren't affected to the same extent by the energy crisis," Mr. Martin said.

The International Monetary Fund in late July sharply downgraded its forecasts for German economic growth, to 1.2% this year and just 0.8% next year, from 2.9% growth in 2021.

It warned that Germany's economy could face high costs and efficiency losses as it adjusts to a more fragmented world economy with gummed up supply chains and expensive energy.

"Our lesson from the crises of the past 2 1/2 years is that these efficient models that we had in the past get very inefficient if there are disruptions," said Thomas Nurnberger, managing director of sales and marketing at Ebm-papst Group, a manufacturer of motors and fans based in southern Germany.

More than three-quarters of the company's 2.3 billion euros annual sales are made outside Germany, while most of the decision-making power, research and development, and production has been at home.

Now, after the system to bring in the materials it needs proved fragile and unreliable, it is building three separate supply chains, in Asia, the Americas and Europe, sourcing most materials close to production in those regions. It "makes us more independent of containers and ships," Mr. Nurnberger said.

It also puts new jobs and investments outside Germany. "We want to get more international," he said.

The German economic miracle -- its rise from devastation after World War II to become one of the richest countries in the world -- has largely been based on exports. Roughly one-quarter of German jobs depend on exports, compared with about 6% in the U.S. Germany's home market is too small to absorb the surplus production of its industrial firms.

But German exports have stalled since late 2017 after adjusting for inflation, and industrial output has shrunk by about 15%. That partly reflects a loss of competitiveness: German industry has fallen behind Italy's in recent years, weighed down by surging labor costs, high corporate taxes and decades of low investment caused by a nationwide focus on debt reduction.

New barriers to international trade have also sprung up amid skepticism in some places of the benefits of an integrated world economy. In the U.S., former President Donald Trump imposed tariffs on goods imported from China and the European Union, among others. Mr. Trump was long critical of Germany's big trade surpluses and threatened to impose tariffs on imported German autos.

"The current crisis [of surging prices] will not be over in a few months," German Chancellor Olaf Scholz said in July as he opened a monthslong series of talks between business groups and trade unions aimed at hashing out economic solutions. "We have to be prepared that this situation will not change in the foreseeable future."

V&B Fliesen GmbH, a tile manufacturer in the west German state of Saarland, said in July it would relocate production from Germany to Turkey this year. About 200 workers at the company's German plant will be reassigned or laid off.

It blamed "extremely high costs for energy, transport, packaging and raw materials as well as the high wage level in Germany." Other countries, especially Spain and Italy, have kept the industry's costs low and gained a competitive advantage, it said.

Siltronic AG, a Munich-based company that produces silicon wafers for the semiconductor industry, recently chose Singapore over Germany as the location of a new 2 billion euro factory, the biggest investment in the company's history.

That reflected lower running costs in Singapore, including for energy and staff, said Christoph von Plotho, the company's CEO.

German businesses have navigated big economic shocks before, including the messy reunification of East and West Germany in the 1990s. Back then, the federal government spent hundreds of billions of dollars to rebuild the formerly Communist East. High spending drove up domestic prices and undermined the competitiveness of German exports, helping to push the unemployment rate to a postwar high of 12%.

A series of labor-market reforms in the early 2000s helped to bring labor costs down and restore German competitiveness. After that, exports boomed, supported by the introduction of the euro, the value of which was weighed down by weaker economies in southern Europe, making German goods less expensive in other currencies.

For a few years, Germany was even the biggest exporter of goods in the world, ahead of the U.S. and China.

After a short but steep recession following the 2008 global financial crisis, Germany's economy bounced back sharply as its businesses pivoted to selling to China. China's growing middle class snapped up Germany's luxury autos while German firms made the machinery and engineering equipment that China needed to build its cities, highways and railroads.

Around that time, former Chancellor Angela Merkel struck deals with Russian President Vladimir Putin that ramped up cheap energy imports.

In addition to the energy crisis, structural changes are contributing to the weaker growth. Germany's auto industry, for decades the jewel at the heart of its manufacturing sector, is dramatically downsizing as it transitions from combustion engines to electric vehicles. And Chinese manufacturing firms are increasingly challenging German firms in international markets.

Kostal Automobil Elektrik, a century-old auto supplier based in western Germany, said in June it would end production in Germany by the end of 2024, closing its three German plants. About 900 jobs will be relocated or cut, according to labor unions. That includes about 100 service-center jobs that will be moved to Budapest.

The family-owned company, whose products are found in roughly half of all cars worldwide, blamed high costs in Germany, aggravated by the pandemic and the sanctions on Russia. It said it also needed to invest heavily in new technologies as the auto industry switches to battery power.

Labor unions warned that Kostal's move could create a domino effect. "There is a risk of a loss of competence and, as a result, the loss of further jobs for the entire German automotive industry as well as the creeping de-industrialization" of the region, said Fabian Ferber, the IG Metall union representative at Kostal.

Ford Motor Co. said in June that it had picked Spain over western Germany to produce a next generation of electric vehicles. Stuart Rowley, head of Ford of Europe, declined to comment in detail on the reasons behind the decision, but analysts point out that Germany's higher wages and energy costs weaken its competitiveness. Mr. Rowley said Ford's German plant in the Saarland region would continue to build the Focus compact car until 2025 but that its future was unclear beyond that.

A decadeslong focus by economic authorities and businesses on reducing debt has held back investment and productivity gains. The nation's net capital stock increased by 21% in the two decades through 2019, compared with 41% for France and 54% for the U.S., according to Bruegel, a Brussels think tank. Even in the key manufacturing sector, German investment has been persistently lower than that in Italy and France, the data show.

Mr. Scholz, the chancellor, plans to ramp up public spending, including on defense and green energy.

Hundreds of midsize German auto suppliers faced with higher raw material and energy costs are struggling to invest in the shift to new technologies, said Bernhard Jacobs, managing director of the Sheet Metal Forming Industry Association, a trade group.

Companies in the sector export about one-third of their products.

Automotive suppliers in Germany have lost 13% of their jobs since mid-2018, according to Deutsche Bank.

"Germany is in danger as an industrial location," Mr. Jacobs said. Businesses in neighboring France are paying one-third less for electricity than their counterparts in Germany, he said. France's heavy reliance on nuclear power has long held down energy costs for the country's manufacturers, although its edge diminished after Germany started directly piping in Russian gas a decade ago.

Demographic changes -- Germany was one of the first European nations to have a rapid fall in births, starting in the 1970s -- mean the country has a dramatic shortage of workers.

Nearly half of German mechanical-engineering companies complain a shortage of skilled workers is hampering production, the highest level in records dating back to 1991, according to a July survey by the German Mechanical Engineering Industry Association, a trade group.

Germany needs to attract about 400,000 workers a year over the coming years just to stand still as its aging baby boomers retire, according to the federal labor agency.

Koerber AG, an engineering company with about 12,000 staff based in Hamburg, doubled its recruiting team to 20 people. It currently has 600 open jobs.

"Previously you posted jobs and got applications, but that is not the case any longer," said Gabriele Fanta, the company's head of human resources. Hiring is difficult across all levels. To fill a blue-collar factory job takes more than 100 days, she said.

To widen the talent net, the company has been building a technology and design office in Porto, Portugal, which now has about 200 staff. It is also adding staff in China and Hungary. "These decisions will increase," Ms. Fanta said. "We are picking people where they are."” [1]

Mr Scholz ruled Germany’s industry into a ditch in amazingly short time. What a turn, what a Wende…

1.  German Economic Engine Falters --- Energy crisis and China slowdown dry up export-focused manufacturing
Fairless, Tom. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 29 July 2022: A.1.