The pandemic, the war and an unprecedented energy crisis did not get the better of the German economy. At least not yet.
Posted at 9:00 a.m.
The largest economy in the Eurozone is still alive. After a decline of 0.3% in the last quarter of 2021, its gross domestic product grew by 0.2% in the first quarter of 2022. During the same period, Italy’s economy plunged by 0.3%, and that of France, Europe’s second largest economy, has stalled.
Germany is therefore avoiding recession, defined by two consecutive quarters of decline, for the time being. And even if the clouds accumulate in the sky, the German bosses remain optimistic.
A poll conducted in April by the Ifo Institute, an economic research center based in Munich, indicates that 7.1% of German companies are worried about their survival. This is half as much as the previous sounding carried out in January, before Russia invaded Ukraine.
Those most worried about their future are companies in the accommodation and catering sector, which are still suffering from the repercussions of the pandemic. In manufacturing, wholesale trade and construction, business morale is still good and order books are full. None of the companies in the real estate and information technology sectors fear the worst.
In many other countries, the possibility of running out of energy next week to continue operating would probably have prompted companies to sound the general alarm.
If they do not fear for the survival of their companies, German bosses still expect to suffer. Most, in the same survey, say that it will be impossible for them to pass on the rising cost of their inputs, especially energy, to their customers, and that their profit margin will shrink.
If Germany is desperate to reduce its dependence on Russian gas and oil, its companies must work very hard to replace their Russian, Belarusian or Ukrainian suppliers. Most of them also think that this will not be possible in the short term.
The challenge is daunting when you consider the complexity of modern supply chains. A giant like Volkswagen, for example, has 5000 direct suppliers, which have an average of 250 suppliers each, which makes 1.25 million suppliers for a single company.1.
The worst case scenario
The worst is probably yet to come for the German economy. If the Russians cut their gas supply as they did to Poland and Bulgaria, the German manufacturing sector risks suffocation.
The German government already has contingency scenarios. A rationing plan would be put in place, with priority given to the population, hospitals and essential services.
The German economy has just avoided recession, but the abrupt end of Russian gas supplies would take the plunge. According to the Bundesbank, the German central bank, the economy would shrink by 2% in this worst-case scenario.
Before the invasion of Ukraine, Germany’s economy ministry predicted growth of 3.6% in 2021. That forecast has since been revised down to 2.2%. This means that there is a thin line between growth and recession.
The current circumstances are an unprecedented stress test for the mighty German machine. The companies in the driver’s seat, thankfully, don’t seem to panic.
1. In a global economy of mistrust, costs are rising, an analysis by Angelo Katsoras, analyst at the National Bank