Soaring costs and shortages push German industry to the brink
“There has never been anything like this before,” Georg Geier, the company’s managing director, told CNN Business.
These companies are a vital part of the “Mittelstand,” the 2.6 million small- and medium-sized enterprises that account for more than half of German economic output and nearly two-thirds of the country’s jobs. Many are family-owned and deeply integrated into rural communities.
“We’re made aware [of our energy costs] nearly each and every day,” Geier said. “When we get up until we get out.”
Europe’s biggest economy is particularly vulnerable. According to the International Energy Agency, Germany relied on Russia for about 46% of its natural gas consumption in 2020. That number is likely to have fallen since the war started, but any sudden interruption in imports from Russia would be “catastrophic” for manufacturers like Siempelkamp, Geier said.
Spiraling prices
So far, Siempelkamp has not cut production, but is passing on eye-watering cost increases to its customers, such as the copper and cement producers that use its grinding mills, and electric car makers that use its machines. In turn, it expects its clients to pass costs to consumers.
In Berlin, an ice cream maker is also feeling the strain.
Florida Eis is partly insulated from high prices — it has switched much of the energy it uses for production and delivery to renewable sources — but its suppliers are not. The company now is paying between 30% and 40% more for its milk.
“The sugar industry needs an enormous amount of energy. If they do not have gas any more, there would not be raw sugar any more,” Höhn said. “We cannot buy raw sugar on the world market due to EU regulations.”
“We would have tremendous cutbacks up to a complete standstill,” he added.
Rocketing prices have rattled a country that has long prided itself on its stable economy, and that still carries a deep-rooted fear of the kind of hyperinflation of the 1920s and 1930s that is widely thought to have helped the Nazi party rise to power.
Siempelkamp Managing Director Dirk Howe wonders how long this can all last.
“We are in a kind of spiral right now,” he told CNN Business.
That advantage has now become a liability.
“Natural gas probably will remain expensive after an embargo or supply cut for quite a significant time,” Sebastian Dullien, research director at the Macroeconomic Policy Institute, told CNN Business.
He warned of “structural damage” to Germany’s economy if Russia cuts off its gas — damage that will be more difficult to recover from than the 2008 financial crisis. That could create a recession at least as deep and potentially much longer lasting than a decade ago.
‘Stagflation’ fears
Inflation is only part of the story.
Germany’s economy may already be heading into a recession. The German Council of Economic Experts, a government advisory group, last month cut its forecast for GDP growth in 2022 from 4.6% to 1.8%, citing inflation and the war in Ukraine.
Manufacturing output contracted this month, falling to its lowest level since June 2020, according to survey data from S&P Global, and slumping confidence could spell a protracted downturn.
“The risk [of a recession], I would say, is more than 50% at the moment,” Dullien said.
‘We have to cope’
Germany’s association for small and medium-sized businesses, said some of its members were already cutting back production due to shortages.
“[Production cuts are] not the result of a lack of electricity, or high electricity prices, but [because] they don’t have materials to produce the goods,” Hans-Jürgen Völz, the association’s chief economist, told CNN Business.
“For instance, aluminum, steel and everything [else] that is in short supply right now all over the world because of sanctions against Russia.”
Höhn, at Florida Eis, considers himself an optimist, but even he can’t ignore the “dark clouds” gathering over the German economy.
“We have to cope,” he said.
