Russia’s master plan for the energy war with Europe is not working: Instead of economic Armageddon, there is only a small winter recession. But there is only limited reason to breathe a sigh of relief: Germany will remain the brake pad in Europe this year.
The good news first: the dreaded end of the world is cancelled. When Vladimir Putin gradually began to turn off the gas tap in Europe in the summer, the gloomy forecasts overturned. There was talk of de-industrialization, of large-scale blackouts, of the collapse of the German economy. That won’t happen this winter if nothing out of the ordinary intervenes. The bad news: Although the really big crash doesn’t materialize, the damage to the land from Putin’s energy war is worst among Europe’s economic heavyweights in Germany.
The German economy surprisingly went into reverse gear in the fourth quarter. From October to December, economic output shrank by 0.2 percent compared to the previous quarter, according to figures from the Federal Statistical Office. In the rest of Europe things are not really looking rosy either. But the other major economies fared somewhat better.
According to the statistics agency Eurostat, Italy only fell by 0.1 percent. The bottom line is that France remained a small plus of 0.1 percent. Spain also coped with Putin’s energy shock better than Germany with growth of 0.2 percent. Ireland, which is much smaller, even grew by 3.5 percent at the end of the year, while Lithuania saw an even sharper decline of minus 1.7 percent. And overall, the economy in the euro zone still managed a mini-growth of 0.1 percent – while Germany was in the doldrums.
The main reason for the recession is consumers’ reluctance to buy in the face of Putin’s energy war. “The high rates of inflation have driven the German economy into the winter recession,” said Timo Wollmershäuser, head of economic activity at the Ifo Institute. In the current quarter, there is a high probability of a further decline, which is likely to be even slightly larger than at the end of 2022. “This means that economic output will be lower again than it was before the outbreak of the corona pandemic in 2019.”
The fact that Germany was hit harder than other major euro countries is partly due to its massive dependence on Russian oil and gas up until Putin’s attack on Ukraine. In this way, Russia was able to curb the economy in this country more than elsewhere by turning on the gas tap. Nevertheless, the German economy still grew by 1.8 percent in 2022. The horror scenarios that prevailed for a long time in view of the Ukraine war have not come true. Even if things went much better in the euro zone as a whole, with an increase of 3.5 percent for the year as a whole, than in its largest economy.
The fact that Germany came through this crisis of the century surprisingly well is mainly due to the remarkable changes in behavior of its inhabitants: against all odds, companies and households managed to cold-drink Russian energy and saved massive amounts of gas. At around 80 percent, the gas storage facilities are currently about 20 percent more full than the average in recent years. In addition, Germany quickly switched with the construction of new LNG terminals and new suppliers such as Norway and Qatar. There is also an unusually mild winter.
The prospects for the new year are therefore no longer as bleak as they were when the Russians invaded Kyiv in February. “It’s really just a technical recession – that is, two consecutive quarters of shrinking GDP – and not a growth setback that was feared until recently,” says Deutsche Bank chief economist Stefan Schneider. Some economists even expect slight economic growth in the current year because the state is providing billions of euros in relief for private households and companies in connection with the sharp rise in energy costs.
But until then it is still a long way. What matters is what happens next winter. The risks remain high: After the LNG terminals in Wilhelmshaven and Lubmin, will the liquefied gas import platforms in Brunsbüttel and Stade go online in time? It is already clear that gas prices will remain significantly higher than they used to be because LNG is significantly more expensive than Russian pipeline gas. That dampens growth prospects.
Added to this are the foreseeable interest rate hikes by the European Central Bank (ECB). In 2022, it raised the key interest rate four times in a row to 2.5 percent in just a few months. The monetary authorities have announced that they want to continue at the same pace in 2023. It will probably already be there on Thursday: A further increase of 0.5 percent is considered certain. That, too, is likely to further stifle the economy.
The International Monetary Fund (IMF) also certifies that Germany has the weakest growth potential among the major euro economies for 2023. In the current forecast, the IMF only predicts a meager plus of 0.1 percent for the year as a whole. This means that Germany will be far below the average in the euro zone (0.7 percent) – and far behind all other larger EU countries. Not only France ( 0.7 percent), but also Italy ( 0.6 percent) and Spain ( 1.1 percent) are almost as clearly ahead of Germany this year as they were last year.
