How the Energy Crisis, a Manufacturing Crunch, and More is Causing Germany's Economy to Fall Behind
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For the bulk of the 2010s, Germany was Europe’s largest, and often sole, bright spot. It kept financial crises and fiscal imbalances largely outside its borders—often to the detriment of its partner Eurozone members—and kept up with American economic growth even whilst most nearby economies fell significantly behind. Germany was the yardstick against which European countries were forced to compare themselves against, and most of them came up short.
Since the pandemic, however, it’s been a different story. Stimulus efforts weren’t strong enough to cause a full economic rebound in 2020/2021. The country’s vaunted complex manufacturing industries like automobiles and aircraft struggled under the weight of supply chain pressures. The energy crisis that began in 2021 has continued to drag down the economy. German GDP per capita remains below pre-pandemic levels and has essentially stagnated since 2018—not only is it falling behind overseas peers like the United States, Canada, South Korea, and more, but its recovery has actually been weaker than in both the broader Eurozone and European Union.
Provisionally, inflation sits at 7.8%—off its peaks as energy prices stabilize, but still higher than at any point between the 1948 West German currency reform and the COVID pandemic. And that energy price stabilization came at a cost—German households and industry have had to endure significant cutbacks in natural gas and electricity consumption over the last year, hampering economic growth further. Inflation continues to spread to broader sectors of the economy, leading the European Central Bank to raise interest rates to the highest level in nearly 15 years and risk throwing the bloc into a recession. Germany currently faces one of the most challenging economic situations of any major country—but so far, it has proved surprisingly resilient—manufacturing is bouncing back, and some degree of optimism is returning to the business outlook. Still, only time will tell if the German economy will bounce back—or fall further behind.
Germany and the Energy Crisis
Natural gas prices began rising across the European Union back in 2021 as Russian companies like Gazprom began strategically limiting supplies before the Russian invasion of Ukraine in early 2022. After the invasion, energy supplies from Russia declined further as the conflict broadened into an economic war—one that culminated in the sabotage of the Nord Stream pipeline connecting Russia to Germany in September. The European Union has been able to largely make up for lost Russian supplies with more pipeline imports from Norway and North Africa alongside Liquefied Natural Gas imports from the US, Qatar, Nigeria, and elsewhere, but these imports have come at a tremendous financial cost and still aren’t quite enough to fully replace Russian supplies.
Germany was especially vulnerable to the withdrawal of Russian natural gas supplies—the country used a disproportionate amount of natural gas for its heavy industry and gas-powered home heating systems, and in 2021, 55% of German natural gas consumption came from Russia. At the start of the war, Germany had no capacity to directly import Liquefied Natural Gas except through neighboring countries, and even that capacity was limited. Herculean efforts to build out LNG import capacity and refill gas storage over the summer, alongside a fortuitously warm winter, helped prevent the worst from occurring—but even they were not enough to completely compensate for the loss of Russian natural gas.
Indeed, Germans have had to endure significant cutbacks in energy consumption as a result of the natural gas shortage. In March, Germany consumed about 0.6 TWh per day less than would be expected given the 2018-2021 average, representing a cutback of 18% for industry & electricity plus a 17.4% cutback for households & businesses.
Electricity consumption has also fallen almost 10% from early 2022 levels, leaving it about on par with the record lows recorded at the very onset of the pandemic. EU-wide, the drop in natural-gas-based electricity production has been offset by wind, solar, and coal—with Germany in particular reopening many coal power plants at low utilization rates. At the same time, the country has halved its nuclear power output by continuing its plan to fully shutter its nuclear power capacity, a decision that will make both surviving the short-term energy crisis and achieving long-term climate goals more difficult.
While overall German manufacturing has recovered—hitting the highest output levels since the start of the pandemic in February—energy-intensive manufacturing has seen drastic production cuts. Even despite a recent recovery, energy-intensive manufacturing output is 15% below early 2018 levels, compared to a drop of less than half that size for overall manufacturing. In key industries like Chemical manufacturing, the output decline is even worse.