Global shortages in industrial components and raw materials are weighing on Germany’s export-driven economy, threatening to brake the recovery from the coronavirus pandemic.
The country’s leading economic institutes (DIW, Ifo, IfW, IWH and RWI) are expected to revise down their growth expectations for Europe’s biggest economy on Thursday. When the think tanks last published their biannual forecasts in April, they predicted that gross domestic product would grow by 3.7 per cent in 2021, after the pandemic caused the economy to shrink by 4.9 per cent in 2020. Since then, shortfalls in materials and logistic logjams have taken the wind out of Germany’s sails.
Earlier this week, the International Monetary Fund downgraded its own global economic forecasts, pointing the finger at supply chain disruptions.
Businesses have to prepare for a “difficult autumn”, Joachim Lang, the head of Germany’s influential industrial lobby, the BDI, said last week in response to sinking export figures.
Ralph Wiechers, chief economist at the mechanical engineering industry group VDMA, told AFP: “Whether it’s wood for pallets, packing materials, steel – an important input for our industry – or computer chips, semiconductors”, businesses were being confronted with shortages across the board. Orders from customers have also begun to drop among the companies Wiechers represents due to an inability to lay their hands on materials. “They are not getting the plastic supplies, so why should they buy a plastic processing machine?” he said.
Red zone
The deterioration of the economic situation has seen a series of Germany’s closely watched economic indicators turn red. Last week, the federal statistics agency Destatis reported that industrial production went into reverse in August, falling by four per cent month-on-month, while incoming orders fell by 7.7 per cent after a record July.
Shortages were having knock-on effects on companies’ production and revenues, Wiechers said, with mechanical engineering among the sectors most heavily affected.
Only Germany’s key automotive sector was suffering more acutely from scarcity – a situation driven largely by the short supply of semiconductors, a component in both conventional and electric vehicles. Production lines in Germany at Volkswagen, Opel and Ford have been at a standstill as bottlenecks tighten, while BMW and Mercedes-Benz have been delivering vehicles with missing components, according to the German weekly WirtschaftsWoche.
Slowing production has meant retailers have had to manage delivery problems, too. Almost 74 per cent were affected, according to a survey by the Munich-based Ifo institute, including bicycle sellers, DIY centres and purveyors of consumer electronics.
Retailers have had to manage delivery problems too. Almost 74% were affected, according to a survey by the Munich-based Ifo institute, including bicycle sellers, DIY centres and purveyors of consumer electronics
The difficult situation has weighed on investor morale, which has fallen to its lowest level since April 2020 on the ZEW institute’s monthly barometer of economic expectations.
Inflation concern
Germany’s exposure to international supply issues and dependence on exports mean Europe’s economic powerhouse will touch its pre-pandemic level “later than most other countries”, said Carsten Brzeski, head of macro research at ING. Supply chain issues had “blown out” the strong growth ignited by the German government’s recovery programme, Brzeski said.
The course of any further stimulus is likely to be determined by the outcome of ongoing coalition talks, with the centre-left Social Democrats poised to lead the next German government.
Scarcities have also contributed to inflationary pressures that have seen prices in Germany rise at their fastest pace since 1993, up 4.1 per cent year on year. Besides shortages in materials, the surge was driven by one-off tax effects related to the pandemic, as well as sharp rises in energy prices – a phenomenon seen across Europe – which rose by 14.3 per cent.
Supply bottlenecks, high energy prices and production stops in Germany were a potentially “toxic mix”, which brought 1970s-style “stagflation” to mind, according to LBBW economist Jens-Oliver Niklasch. In such circumstances, rising prices that are not compensated for by faster growth lead to the economy getting weaker.