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German recession fears deepen as economy is hit by ‘perfect storm’

Investors are now more pessimistic about the German economy than at any time since the eurozone debt crisis more than a decade ago, fearing that a sharp decline in Russia’s natural gas supply and rising energy prices will plunge the country into recession.

The gauge of investor expectations about Europe’s largest economy has fallen to its lowest level since 2011, from minus 53.8 to minus 55.3, underlining the growing gloom over the economic fallout from 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 pipeline last month after a maintenance shutdown, but kept the main pipeline supplying gas to Europe at just one-fifth of capacity. .

Economists have lowered their estimates for growth in Germany and the wider eurozone this year, while raising their inflation forecasts and warning that a shutdown of Russia’s energy supply would force Berlin to ration gas supplies for heavy industrial users.

On Tuesday, Germany’s base load power for delivery next year, the European reference price, rose more than 5 percent to a record €502 per megawatt hour, according to the European Energy Exchange. This is six times higher than a year ago – driven up by the sharply higher cost of gas for electricity generation and the prolonged European heat wave that has disrupted generation capacity.

The rising price of energy has pushed up import costs for Germany and other eurozone countries, pushing the bloc’s trade deficit to €24.6 billion in June, from a surplus of €17.2 billion in the same month a year earlier. , according to the report. data from Eurostat, the statistical office of the European Commission. The value of bloc exports rose 20.1 percent in June from a year ago, but imports rose 43.5%.

“The still strong rise in consumer prices and the expected additional costs for heating and electricity are currently having a particularly negative effect on the outlook for the consumer-related sectors of the economy,” said Michael Schröder, researcher at the ZEW.

He said investor sentiment also deteriorated on the back of an expected tightening in funding conditions after the European Central Bank raised its deposit rate by 0.5 percentage point to zero in response to record levels of inflation in the eurozone.

Carsten Brzeski, head of macro research at Dutch bank ING, said the German economy was “quickly approaching a perfect storm” caused by “high inflation, potential energy supply disruptions and ongoing supply frictions”.

A heat wave and a dry spell have lowered water levels on the Rhine below the level at which barges can be fully loaded, limiting important stocks for factories, which Brzeski estimated would be as much as 0.5 percentage point of Germany’s growth this year. turn.

In addition 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 drive up the cost for a family of four by €240 in the last three months of the year.

Germany’s chief network regulator told the Financial Times this month that the country must cut its gas consumption by a fifth to avoid a crippling shortage this winter. The Ministry of Economic Affairs has also instructed all companies and local authorities to lower the minimum room temperature in their workplaces to 19°C in winter.

The country has reached its goal of filling its gas storage facilities to three-quarters of capacity two weeks ahead of schedule, after high prices and fuel-saving measures led to reduced use. But there are concerns that the target of raising gas storage to a 95 percent capacity target by November will prove more challenging if Russia continues to curb inventories.

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 percent, the largest cut of any country.

Additional reporting by Harry Dempsey

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