On the verge of a recession: how attempts to abandon Russian energy resources affected the German economy

Business sentiment in Germany has deteriorated to record lows in the past two years.

Such data on Monday, July 25, reported the German Institute for Economic Research IFO.

According to the organization's report, in July the business climate index in Germany fell from 92.2 to 88.6 points.

The last time such an indicator could be observed in June 2020, when the country was experiencing the consequences of the COVID-19 pandemic.

According to IFO experts, pessimism is now observed in almost all sectors of the German economy.

In particular, we are talking about the service sector, the manufacturing industry, trade and construction.

“Companies expect that it will become much more difficult to do business in the coming months.

They are also less satisfied with their current situation.

Rising energy prices and the threat of gas shortages are putting pressure on the economy.

Germany is on the verge of a recession,” the study says.

Economists at S&P Global adhere to a similar assessment.

According to the company's preliminary estimates, in July the business activity index (PMI) in the manufacturing and services sector in Germany fell below the critical level of 50 points and reached 48 units.

This level indicates the beginning of the economic downturn in the country.

“Having previously received a boost to growth thanks to the easing of coronavirus restrictions, in July, due to a combination of various factors, the German economy began to contract for the first time in 2022 ... production forecasts are becoming increasingly negative.

Not surprisingly, for the first time in two years, corporate expectations turned negative,” said S&P Global economist Paul Smith.

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As calculated by Eurostat, over the past 12 months, inflation in Germany has accelerated by about four times - from 2.1 to 8.2% in annual terms.

One of the main reasons for the increase in prices for goods and services in the country was the actions of the German authorities in the energy sector, Vladimir Olenchenko, a senior researcher at the Center for European Studies at IMEMO RAS, is sure.

“Berlin wants to adapt to the instructions from the European Commission on the transition to green energy and at the same time is trying to do without Russian hydrocarbons.

These two factors lead to an increase in the cost of business processes and the life of the population.

Inflation is rising, consumer demand is falling, which leads to a deterioration in economic sentiment.

A recession, most likely, cannot be avoided, ”explained the interlocutor of RT.

A similar point of view is shared by Natalia Shebalina, Senior Analyst at Freedom Finance Investment Company.

According to her, high energy prices make a significant part of German industry unprofitable, and if production stops, the German economy will face a sharp increase in unemployment and a banking crisis, as closed companies will no longer be able to service loans.

“Over the past 20 years, the German economic model has been based on the import of cheap hydrocarbons from Russia, the use of energy in industrial production and the export of manufactured goods to countries on the periphery of the European Union.

As we see from the latest foreign trade data, which showed the first trade deficit in 30 years, this model no longer works, ”Shebalina added in a conversation with RT.

gas stupor

One of the key challenges for the German economy has been the shortage of Russian gas.

The country has already declared a state of alarm in connection with the reduction in the supply of raw materials.

Against this background, Berlin is actively urging citizens and businesses to save energy consumption so that the country can endure the coming winter.

“We are experiencing a gas crisis.

From now on, gas is a scarce commodity.

Prices have already skyrocketed and we need to prepare for further increases.

This will affect industrial production and will become a heavy burden for many consumers, ”said Robert Habeck, head of the German Ministry of Economy.

Recall that in June the pumping of gas from Russia to Germany via Nord Stream fell by almost 2.5 times - to 67 million cubic meters.

m. As explained in Gazprom, some of the gas compressor units (GCUs) had expired and were stopped.

At the same time, the German company Siemens was unable to return one of the turbine engines after repair due to anti-Russian sanctions from Canada, which made maintenance of other GPUs impossible.

Initially, in Germany, Gazprom's explanations were considered far-fetched, but later they turned to Canada with a request to bring equipment.

Although Ukraine opposed such a decision, Ottawa agreed to temporarily lift some of the restrictions on Russia and send the turbine.

Now the parties are continuing proceedings around the documents for the return of the engine, but the Kremlin expects that in the end the equipment will be returned and installed.

“We still have problems with other units, which Siemens is also well aware of.

But, of course, the turbine will be installed after the completion of all the formalities of the technological process.

And the pumping will go to the extent that is technologically possible, ”Press Secretary of the President of Russia Dmitry Peskov said on Monday.

In turn, Gazprom reported in the late afternoon that for technical reasons they would be forced to stop another gas turbine engine at the Portovaya station.

From July 27, the daily capacity of this compressor station will be up to 33 million cubic meters.

m.

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Meanwhile, Europe fears a complete cessation of Russian gas supplies.

As European Commission President Ursula von der Leyen said in an interview with DPA on July 25, today Moscow only partially exports or does not supply raw materials to 12 countries of the association.

Against this background, sooner or later, the supply may completely stop, the head of the EC did not rule out.

“Therefore, it is important that all member states reduce consumption, so that everyone saves more and shares it (gas. -

) with those members that have suffered the most.

Energy solidarity is the main principle of the European agreements,” TASS quotes von der Leyen.

According to her, EU countries should reduce natural gas consumption by about 15%.

However, such an initiative has already been opposed by France, Italy, Spain, Greece and Portugal.

“In theory, this scenario is possible, but then officials will have to explain to residents why they should freeze in winter.

A number of states have already refused to follow the recommendations of the European Commission, and almost certainly the corresponding proposal will be received with hostility in many other countries, ”Roman Etkind, a specialist in international financial markets at the Finmir marketplace, told RT.

Russia, in turn, is not interested in cutting off gas supplies to the EU, Dmitry Peskov said.

However, according to him, the situation will depend on the further sanctions rhetoric of Europe itself.

“Russia is a responsible gas supplier, and no matter what anyone says – in the European Commission, in European capitals, the United States – Russia was, is and remains a country that largely guarantees energy security in Europe… On the other hand, if Europe continues its way of this absolute reckless imposition of restrictions and sanctions that hit her, then the situation will be different here,” the Kremlin spokesman emphasized.

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Now, according to various estimates, the German economy depends on Russian gas by 40-55%, and in the event of a cessation of supplies, the country could lose approximately 4.8% of GDP within three years.

This conclusion was reached by the International Monetary Fund.

According to Vladimir Olenchenko, replacing Russian gas with raw materials from other suppliers will cost Berlin much more.

In this case, the German leadership will have to increase spending and shrink at the expense of the population, as well as reduce subsidies to other EU countries, the expert believes.

“The share of Germany accounts for about 21.5% of the GDP of the European Union.

The EU budget is formed at the expense of the participating countries, and it is Germany that makes the largest contribution.

Therefore, Berlin will already face a dilemma: continue to give part of its money to the European Union or use it for national needs, ”added Olenchenko.

Domino effect

Note that, in addition to Germany, the rapid growth of consumer prices is observed in a number of other EU countries.

To date, in about half of European countries, inflation in annual terms exceeds 10%, and in some countries of the region (Lithuania and Estonia), the figure has exceeded 20%, according to Eurostat.

The deterioration of the economic situation in Europe led to a record depreciation of the euro over the past 20 years.

So, in mid-July, the single currency at a certain point even cost less than the American one - for the first time since 2002.

Under these conditions, on July 21, the European Central Bank for the first time in 11 years decided to raise the interest rate - from 0 to 0.5% per annum.

According to experts, such actions by the ECB should contain inflation and strengthen the euro, but the rise in the cost of loans could further weaken the European economy.

At the same time, the simultaneous start of a recession in Germany runs the risk of spreading to the entire region, experts do not exclude.

“The fall in German exports will weaken the euro, and this will accelerate inflation in each of the countries of the monetary union.

The single labor market will allow the shock of unemployment to spread to other countries, which will make the ECB rate hike even more risky,” suggested Natalia Shebalina.

The general situation in the European economy is aggravated by the approach of the heating season, Vladimir Olenchenko noted.

According to him, due to the lack of Russian energy resources, the European authorities will have to make a number of unpopular decisions, but not all politicians want to do this, which explains a series of resignations in the governments of the countries of the region.

According to Roman Etkind, the current state of affairs may indicate the beginning of a full-fledged political crisis.

“In France, Macron’s party lost its majority, Italian Prime Minister Mario Draghi resigned, British Prime Minister Boris Johnson was forced to follow the same path.

The chairmen of the governments of Estonia and Bulgaria also left, and stuffing began to appear in the media about German Chancellor Olaf Scholz.

At the same time, key elections will be held in a number of countries in 2022 and 2023.

So in terms of political struggle, autumn and winter in Europe will definitely be hot,” Etkind concluded.