Surging Energy Costs Are Weighing on German Manufacturing

October 6, 2022

The key pillar of the German economy, its manufacturing sector, is beginning to slow as energy prices in the nation continue to surge.

German industrial production fell by 0.8% in August from the month before, according to preliminary data released by the country’s statistics office. Output is down nearly 3% from February, when Russia’s invasion of Ukraine sent energy prices skyrocketing.

Energy-intensive sectors like chemical, glass, and metal manufacturing have fared even worse, with output down 2.1% from July and 8.6% since February.

In a separate report, the statistics office said that new orders of factory-made goods were down 2.4% in August from July and noted that it was German customers rather than overseas buyers who cut back the most severely.

Economists believe that a slowdown in German manufacturing, which accounts for more than one-fifth of the nation’s total economic output, means that a broader economic slowdown is all but inevitable. 

The country has successfully been able to fill its strategic gas reserves, which are currently about 93% full according to estimates from Gas Infrastructure Europe, higher energy prices continue to fuel consumer inflation, which hit 10% annually in September.

Manufacturers have already slashed production, laid off workers, and moved operations overseas, though as gas prices continue to climb during the winter months, they may have to take more drastic steps. Deutsche Bank estimates that as many as 2 million German workers could be furloughed by next spring as their employers contend with high prices and potential fuel shortages.

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