German Production Declines As Energy Prices Hit Factories

"German factory output fell in August, driven by cutbacks in energy-intensive industries as costs surged following reductions in the supply of natural gas from Russia.

With separate figures showing a sharp drop in new orders during the month, and retail sales also falling, the outlook is for further declines in one of the world's industrial powerhouses as the global economic damage caused by the sanctions on Russia continues to mount.

So far this year, businesses have borne the brunt of energy price rises in Germany and are responsible for most of the savings in gas consumption, with household usage up from last year in recent weeks.

The cost of the sanctions for manufacturers partly will depend on government measures to limit the price of energy for businesses and consumers, which were announced late last month but which have yet to be set out in detail.

The same is true for Europe as a whole, with the fate of the economy largely resting on the availability of alternatives to Russian gas and the continent's ability to avoid energy rationing.

"The story is totally dominated by what's going to happen to gas, gas supply and fiscal policy response to gas," said Olivier Blanchard, formerly the International Monetary Fund's chief economist and now a fellow at the Peterson Institute for International Economics. "There is enormous uncertainty."

With gas stores in Germany more than 92% full according to this week's government figures, few experts expect the country to run out of gas this winter barring a prolonged cold spell, but high prices are likely to endure and supplies for the following winter aren't guaranteed.

Germany's statistics office Friday said industrial production was 0.8% lower in August than in July, and down 2.9% from February, when sanctions on Russia began.

Manufacturing plays a bigger part in Germany's economy than in many others that rely more on services and consumption.

Last week, gas leaks from that pipeline and its closed twin pipeline, Nord Stream 2, following detonations registered on seismographs raised fears about a possible sabotage operation and prompted questions about the security of Europe's energy infrastructure.

Higher gas prices have made it difficult for some energy-intensive industries to make and sell their products at a profit, leading to cutbacks in output. In its release Friday, the statistics office, Destatis, said output in a range of sectors that use a lot of energy -- chemicals, metals and ceramics -- was down 2.1% from July and 8.6% since February.

In a separate release Thursday, the statistics office said new orders for factory-made goods fell 2.4% in August from July, with German rather than overseas buyers cutting back most sharply.

"Today's data are like a sneak preview of more to come," wrote Carsten Brzeski, an economist at ING Bank, in a note to clients. "High energy prices will increasingly weigh on private consumption and industrial production, making a contraction of the economy inevitable. The only question is how severe such a contraction or recession will be."" [1]

That is a big luck for China that is angling to get up in production chain, out-competing Germany.

 

1. World News: German Production Declines As Energy Prices Hit Factories
Hannon, Paul. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 Oct 2022: A.8.