High Energy Prices a Threat to German industry 🥨🦝

German industry weakens as high energy prices are leaving their mark on production costs.

German industry is clearly suffering from disrupted supply chains on the back of the war in Ukraine, the aftermath of pre-summer lockdowns in China, low water levels in the main rivers and increasingly, higher energy prices. The statistical office released additional data showing that production in the energy-intensive industrial segments declined by more than the broader industry (-1.9% year-on-year). Production in this area has dropped by 6.9% since February 2022.

For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a ticking time bomb. With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading. In this regard, it is remarkable that the government’s third relief package presented on Sunday provided only very limited support for this segment of the economy.

Looking ahead, shrinking order books since the start of the Ukraine war, the well-known supply chain problems (both international and domestic) plus high uncertainty, high energy and commodity prices and potential energy supply disruptions will not make life any easier. Judging from the first macro data for the third quarter, the German economy has not fallen off a cliff at the start of the third quarter but is rather sliding into recession.

One thing that could reverse the course of a major correction could only be the end of the crisis/war in Ukraine. For the time being that scenario is not likely while the new Prime minister in the UK may add to the worries. Will share more thoughts on this in the next coming days.

One Love,

The FXPROFESSOR