Germany is facing a bad time when energy is scarce and expensive and when economic output will shrink.

There has been no doubt about this forecast at least since the gas supply stop for the Nord Stream 1 pipeline.

In its autumn forecast, the Kiel Institute for the World Economy (IfW) predicts that economic output will decrease by 0.7 percent compared to this year.

But how exactly does this downturn come about?

And how are the different areas of the economy connected?

Johannes Pennekamp

Responsible editor for economic reporting, responsible for "The Lounge".

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To understand why Germany is now slipping into the red and losing prosperity, you have to know that Europe's largest economy was already struggling before the Russian attack on Ukraine.

Unlike in many other industrialized countries, the Corona crisis was not followed by a resounding recovery, but only a gradual one.

Gross domestic product was already stagnating at the end of 2021, and Germany only reached the pre-crisis level this late summer and thus later than almost all other comparable economies.

The main reason for this: As an export nation that sells many more goods abroad than it imports from there, Germany is more vulnerable to the supply chain problems that have arisen during the pandemic: Because components and computer chips are stuck in traffic jams on the oceans and not in the factories arrived and some still haven't arrived, industrial companies could not process their orders.

So the demand for cars, machines, clothes and also for services was there.

But it could not always be delivered.

Economists call this the supply shock.

One consequence: rising prices.

What is often forgotten today: In January, shortly before the Russian attack, inflation in Germany was 4.9 percent.

The supply chain problems are not over.

Since the Russian attack, however, they have been overshadowed by rising energy prices.

With all their might, they are in the process of triggering a so-called demand shock.

This occurs on different channels.

First, companies have to pay extremely high energy bills, and a significant portion of the money goes abroad.

The German energy bill is estimated to increase by 120 billion euros this year.

People have less in their pockets

It is true that companies can often pass on some of the higher costs to their customers in the form of higher prices.

Expensive vegetables in the supermarket are a good example of this.

However, there are other cases.

The first energy-intensive companies such as steel mills have put production in Germany on hold, the toilet paper manufacturer Hakle, for example, has already had to file for bankruptcy.

The financial leeway is shrinking, which is being reinforced by the fact that the European Central Bank is fighting inflation with higher interest rates.

This makes the credit conditions at the banks less attractive, at least indirectly.

All of this is holding back corporate investment, which in turn is a key driver of future growth.

If no better, more efficient machines are bought today or new research projects can be started, this will leave a permanent mark.

There will also be less scope for higher wages in the affected sectors this winter.

If the crisis lasts longer, employees will have to be laid off.