Germany on the Brink of Recession

Germany on the Brink of Recession

In 2021 Germany imported 102 billion cubic meters of natural gas, the largest volume in all of Europe, followed by Italy, which imported 62.9 billion cubic meters (Natural Gas Imports in European Countries 2020 | Statista, 2020).  The leading gas exporters are Norway and Russia. One of the main gas pipelines, called the Nord Stream, transports natural gas from Russia to Germany and it is from this pipeline that Germany receives most of their gas.

As the war in Ukraine continues, mass tension is being created between Russia and European countries. As Europe continues to force sanctions on Russia, Russia is reducing the gas supply to Europe. Gazprom claims the Nord Stream 1 was shut down due to technical reasons, however, Germany rejects this claim. The company tweeted that it would reduce the “daily throughput” of the pipeline to 33 million cubic meters, shutting down for the second set of repairs, reduced from its regular output of approximately 150 million per day. The pipeline is once again operational, but only transporting a fraction of the gas it did previously. Russia’s Gazprom said that it would further reduce natural gas flows through a major pipeline to Europe to 20% capacity.

Countries such as Germany are suffering due to this lowered gas supply, with many European countries struggling to build up storage in preparation for winter. Germany has set gas storage targets, aiming to reach 85% by October 1st, and 95% by November 1st. Currently, the gas storage levels are at approximately 65.1% and slightly decreasing as gas stores are used to satisfy current demand. According to Kalus Mueller, head of Germany’s energy regulator BNA, Germany will need to cut its gas demand by 20% to avoid severe gas shortages in the coming winter. The total capacity for injection and withdrawal for German gas storage facilities is approximately 23 billion cubic meters, which is the fourth largest in the world. The only countries to have greater gas capacities are the US, Ukraine and Russia. Therefore, this would require Germany to acquire 6.88 billion cubic meters of gas before November the 1st. The outcome of this winter will be decided based on Germany’s relationship with Russia and Germany’s ability to source energy through other methods.

The current energy prices in Germany are 54 cents/kWh (AUD) according to the Federal Association of Energy and Water Industries whilst simultaneously gasoline costs $2.56 per litre (AUD). Recent worries over the soaring energy prices and gas shortages knocked business confidence to its lowest levels in more than two years. Research institute IFO warned that German companies are more pessimistic about their current situation and the outlook for the next six months. This pessimism is reflected in the Business Climate Index, as it dropped to 88.6, the lowest in more than two years and below the 90.2 forecast (Reuters, 2022).

Robin Brooks, the chief economist at IIF, tweeted stating that “recent data flow is increasingly pointing to a severe recession that will engulf Germany”. Germany will have some important decisions to make within the next few months to avoid a recession, and these decisions will likely have a lasting economic and geopolitical impact.

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