Investors are now more pessimistic about the German economy than they have been since the euro zone debt crisis more than a decade ago, fearing that a sharp drop in natural gas supplies Russia and soaring energy prices plunge the country into recession.
The ZEW Institute’s indicator of investor expectations for Europe’s biggest economy fell to its lowest level since 2011, from minus 53.8 to minus 55.3, underscoring growing gloom over the economic fallout of the Russian invasion of Ukraine.
The think tank’s survey of financial market participants provides an early indicator of economic sentiment after Russia reopened the Nord Stream 1 gas pipeline after a maintenance hiatus last month but kept the main gas delivery conduit running to Europe operating at only a fifth of its capacity.
Economists cut their growth estimates for Germany and the wider eurozone this year, while raising their inflation forecasts and warning that the end of Russian energy supplies would force Berlin to ration gas supplies for large industrial users.
On Tuesday, German baseload electricity for delivery next year, the benchmark European price, rose more than 5% to a record €502 per megawatt-hour, according to the European Energy Exchange. This is six times higher than the price a year ago, pushed up by the significantly higher cost of gas used to generate electricity and the prolonged heat wave in Europe which has disrupted the capacity of production.
Soaring energy prices have pushed up the cost of imports for Germany and other eurozone nations, pushing the bloc’s trade deficit to 24.6 billion euros in June, from a surplus by 17.2 billion euros for the same month a year earlier, according to data from Eurostat, the statistics office of the European Commission. The value of the bloc’s exports rose 20.1% in June from a year ago, but imports rose 43.5%.
“The still high rise in consumer prices and the expected additional costs for heating and electricity are currently having a particularly negative impact on the outlook for consumer-related sectors of the economy,” said ZEW researcher Michael Schröder. .
He said investor sentiment also deteriorated on an expected tightening of funding conditions after the European Central Bank raised its deposit rate by 0.5 percentage points to zero in response to record highs. euro area inflation.
Carsten Brzeski, head of macroeconomic research at Dutch bank ING, said the German economy was “rapidly approaching a perfect storm” caused by “high inflation, possible disruptions in energy supplies and ongoing supply frictions”.
A heat wave and dry spell have reduced water levels on the Rhine below the level at which barges can be fully loaded, limiting important supplies for factories, which Brzeski says could drop up to to 0.5 percentage points in German growth this year.
Adding to the gloom, German households will have to pay hundreds of euros more in fuel bills this winter after the government unveiled an additional gas tax of 2.419 cents per KWH from October. This is expected to increase the cost for a family of four by €240 over the last three months of the year.
Germany’s main grid regulator told the Financial Times this month that the country needed to cut its gas consumption by a fifth to avoid a crippling shortage this winter. The Ministry of Economy has also ordered all businesses and local authorities to reduce the minimum ambient temperature in their work spaces to 19°C during the winter.
The country met its target of filling gas storage facilities to three-quarters capacity two weeks ahead of schedule, after high prices and fuel-saving measures led to reduced usage. But there are fears that its goal of bringing gas storage to a 95% capacity target by November could be more difficult if Russia continues to limit its supplies.
The German economy stagnated in the second quarter, the weakest performance of the major eurozone countries. Last month, the IMF cut its forecast for German growth next year by 1.9 percentage points to 0.8%, the biggest downgrade of any country.
Additional reporting by Harry Dempsey