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The danger of reading too much into scraps of economic data is illustrated by Germany’s latest export figures.

German exports hit a record high in June, according to figures released last week. However, economists say rising prices and rampant inflation are responsible for the increase, rather than German exports being in good health.

Germany is an export giant. It is the third largest exporter in the world, in first place behind China and in second place behind the United States.

However, there is growing anxiety about the extent to which Germany’s export-dependent economy has been exposed by a series of global events in recent years.

Trade wars and rising tension between the West and China, supply shocks from the COVID pandemic and, more recently, the war in Ukraine, have upended the order on which much of the recent prosperity has been based from Germany
Endgame for Made in Germany?

“Globally, there is no economy more exposed to the changes of globalization than Germany,” Andreas Nölke, professor of political science at Frankfurt’s Goethe University, told DW.

Nölke has written a book entitled “Exportism: The German Drug” in which he argues that Germany has become addicted to its powerful export base and needs a new economic model to meet the demands of a changed global context.

“Germany was one of the countries that benefited the most from the period of globalization that we have seen from 1990 until and perhaps right after the global financial crisis,” he said. “But now you can see that the data on globalization is slowly but steadily declining. I think Germany is in trouble.”

German trade data for May revealed the country’s first trade deficit in more than 30 years, meaning it had imported more than it had exported. Carsten Brzeski, an economist at ING Bank and a long-time analyst of the German economy, assessed the news in harsh terms.

“The war in Ukraine puts an end to the German economic business model as we knew it, a model that was based primarily on cheap energy imports and industrial exports to an increasingly globalized world,” he said.
Gas games

While Nölke argues that the risk of Germany’s export exposure has been evident for years, one of the most recent and pressing threats is the crisis surrounding Russian energy, particularly gas.

Europe’s largest economy has been one of the most dependent on Russian energy for decades, but the war has forced a colossal rethink. With the EU rushing to reduce Russian energy imports and Russia itself reducing the amount it supplies, many of Germany’s major export industries are wondering how they can survive without the relatively cheap energy they have relied on for so long.

While much of the focus on the impact of the energy crisis has been on households, German industry could be hit hard.

A recent survey of 3,500 companies by the German Chamber of Industry and Commerce (DIHK) found that 16% were reducing production or partially suspending their business operations due to rising energy prices .

“These are alarming figures,” said DIHK chairman Peter Adrian. “They show how permanently high energy prices are a burden.”

Ammonia on the chopping block
The warnings have become increasingly severe. Commerzbank, one of Germany’s biggest corporate lenders, said last week that the gas crisis could lead to a “severe recession”, comparing the fallout to the 2008 global financial crisis.

Some sectors of German industry are particularly energy intensive. The chemical sector is the most significant (see the graph below), although around a third of the nearly 30% energy share it had in 2020 corresponded to raw materials, such as gas, which used directly to produce certain chemical products.

Other key energy-intensive sectors in Germany include the metals sector, coke and mineral oil production, and glass and ceramics. Common to most, if not all, of the energy-intensive sectors is that they are the main drivers of German exports.

At the start of the crisis, German group BASF, the world’s largest chemical group, warned that it would have to stop production if natural gas supplies fell to 50% of its requirements.

Last week, the company duly announced that it would cut ammonia production due to rising energy costs, a decision that could have implications for ammonia-dependent sectors such as plastics production, manufacturing of fertilizers and the fizzy drinks industry.

Ammonia production has been reduced before in times of high gas prices and can be replaced by foreign suppliers. However, Nölke sees this as an example of how things may start to change in the long term for German industry.

It also highlights that other price-sensitive sectors and exporters are at significant risk of going out of business due to the energy situation, particularly in areas related to steel components.

“The best example is the auto parts industry and the companies that are producing parts for the big car companies,” he said. “This is a section of the industries that is in deep trouble at the moment.”

Today Russia, tomorrow China
As serious as the energy crisis is, the existential threat to Germany’s export-based economic model comes from many factors, and not just from the war in Ukraine and its knock-on effects for global energy markets.

Another major cause for concern is the dependence of the German business sector on China, for example. China remains Germany’s top trading partner, a situation critics say is unacceptable given deteriorating relations between China and the West, and the risk that China’s decoupling will become a political and economic imperative .

“Clearly at the moment, large parts of German industry … are very dependent on the Chinese market. And if there is a big confrontation, there are big problems for that part of Germany,” Nölke said.

The energy crisis is just the latest in a series of threats. For Germany’s army of exporting companies, the coming years present a unique challenge: to prove that Made in Germany is still about products, rather than crises.
Source: Deutsche Welle