Germany surprised on Monday by unexpectedly reporting its first trade deficit since 1991. The reversal of the trade balance in Europe’s largest economy shows how difficult it is for German companies to handle rising costs of oil and gas. Economists at ABN Amro and Nomura meanwhile expect Europe will enter into a recession.
Although a trade deficit on its own is not seen as an economic risk, Germany’s latest trade balance data confirms that the global energy crisis poses major risks for the entire Eurozone economy, whose countries all depend substantially on Russian energy imports to keep their factories running.
The aggravating energy crisis has led to a surge in prices of oil and gas as Russia reduced its natural gas exports to Europe. The trade deficit for Germany in May swung to a deficit of 1 billion euro as the costs of its imports rose nearly 28 percent in May compared to the same month a year earlier. Imports rose 2.7 percent compared to April.
Exports declined on nominal terms
At the same time, exports fell for the third time in five months, by 0.5 percent on seasonally adjusted terms, although they still rose by 11.7 percent compared to May last year. German imports totalled 126.7 billion euro in May, while exports stood at 125.8 billion.
The deficit for Germany is expected to grow further in June when a 60 percent cut in Russian gas supplies forced importers to cover their needs by buying on the spot market against higher prices. Observers fear that Russia may decide to completely shut down its gas supplies after the summer.
Bert Colijn, senior economist at ING, noted that the rising import prices “put a huge strain on the balance sheet” while exports also declined in nominal terms, before being adjusted for inflation.
“The German manufacturing industry is in a bad way because of the disrupted supply chains,” Colijn said. “With demand for German products also declining, concerns about the German economy at the moment seem justified.”
‘Social explosives’
German Chancellor Olaf Scholz on Sunday said there is a need to counter the impact of rising energy prices, which he described in an interview with ARD television as “social explosives”. On Monday, Scholz was due to meet representatives of businesses and trade unions to discuss the energy crisis.
“Entire industries are in danger of collapsing forever because of gas bottlenecks,” Yasmin Fahimi, head of the German Federation of Trade Unions, said in an interview with the Bild am Sonntag newspaper on Sunday, pointing to the chemical, glass and aluminium industries, all of which are major suppliers to the key automotive sector. “Such a collapse would have massive consequences for the entire economy and jobs in Germany.”
German industry preparing for ‘gas lockdown’
German manufacturers meanwhile are looking for ways to prepare for a “gas lockdown” at the moment that the government decides to ration the available supplies. Under these conditions, multinationals such as chemical producer BASF, car makers VW and BMW and industrials group ThyssenKrupp companies could be classed as “systemically relevant”, which could entitle them to keep their factory lines open. Smaller companies could possibly be required to reduce their output or even forced to shut down.
The economic bureau of ABN Amro expects dark scenarios in the economies of the Eurozone now that Russia seems to be going to cut off gas supplies to Europe abruptly. In that case, “a deep recession may unfold in the Eurozone and the UK in the coming year”. Also see InvestmentOfficer.nl
ABN Amro has significantly downgraded its growth forecasts, with stagnation expected on both sides of the Atlantic as the new base case for 2023. These downward revisions of GDP growth forecasts, which amount to more than 2 percentage points, are the result of rising interest rates worldwide due to very persistent inflation.
Nomura sees ‘same fate’ for Europe as for US
In a note to investors, Japanese investment bank Nomura forecasts that “European economies will suffer the same fate - recession - as the US,” and expects the European economy to start contracting over the course of the second half of 2022 and for the recession to continue until the summer of 2023, with a total decline of 1.7 percent of GDP.
Economists generally disagree on the question whether a trade deficit is good or bad, given that there are a wide range of variables that affect the balance between imports and exports.
A wide trade surplus, with exports exceeding imports, has been a trade mark of Germany’s status as economic powerhouse since World War II and has for decades underpinned the country’s leadership in Europe.
At the European level, the latest trade data shows that both exports and imports declined in February compared to January. On balance the Eurozone had a trade deficit of 7.6 billion euro in February, while the EU showed a deficit of 15.8 billion euro that month. The eurozone deficit has continued to widen since May 2021.
German trade data May 2022, as reported by Destatis:
