Recession fears shake Germany as energy costs hit business :

“Not pasta then?” Germans quipped earlier this month, on hearing that of all things, a toilet paper manufacturer had gone bust.

After all, while toilet paper was the second most sought-after supermarket item during the height of the pandemic, pasta was the first. Consumers were strictly rationed to just one or two packets of rolls to ensure that no one went without. But having boomed during the pandemic, the luxury brand Hakle from Düsseldorf – known for “bringing comfort since 1928” with its three-ply rolls – has bombed as a result of the energy crisis. It is the first large German consumer goods producer to collapse because of soaring energy and raw material costs, and there is much to suggest that it will be followed by many more.

Last week the Munich-based Ifo Institute for Economic Research slashed its prognosis for German growth, declaring “we are heading into a winter recession”. It forecast Europe’s largest economy would shrink by 0.3% in 2023, after growing by just 1.6% this year. Inflation is forecast to hit 8.1% this year and 9.3% in 2023.

“The cuts to gas supplies from Russia this summer and the drastic price increases they triggered are wreaking havoc on economic recovery following the coronavirus,” said Timo Wollmershäuser, Ifo’s head of forecasts, adding that he did not expect a “return to normal” until 2024, when 1.8% growth and 2.4% inflation could be expected.

The German chancellor, Olaf Scholz, is travelling to the Gulf this weekend asto secure supplies of liquified natural gas (LNG) from the United Arab Emirates, as Russia chokes off its supply of gas. The economy minister, Robert Habeck, said: “The gas supply is gradually broadening and the government is permanently in talks with many countries, also with nations on the Arabian peninsula.”

Paper production is highly energy intensive. Hakle used 60,000 megawatt hours of gas and 40,000 MWh of electricity every year. The rises in energy costs came so hard and fast, the company said, it was unable to pass them on in time to consumers, who in turn have been switching to cheaper two-ply loo roll.

Company bosses, trade union leaders, shopkeepers and employees across the country are openly expressing their fears of a crisis in Europe’s largest economy that is in danger of spiralling out of control. They call into question the apparent optimism of Scholz, who has adopted the Gerry and the Habeck has admitted “the financial pressure is enormous”, offering the faint hope that “if we manage to get through this winter, we have a good chance that by next summer and winter things will be considerably more relaxed”.

In Hanover, northern Germany, baker Eckehard Vatter, who has 35 branches and employs 430 people, went to the press recently after his gas bill rose by 1,200% to €75,000 (£65,800) a month. “Are they crazy? We will have to turn off the ovens,” he said, taking to the streets with about 1,000 other bakers on Wednesday, who held up placards accusing politicians of “steering us into the biggest crisis of all time” and calling for urgent state support.

Yasmin Fahimi, the head of the Federation of German Trade Unions (DGB), said she fears the consequences of so many challenges coming at once. “Some companies are on the edge. This risks a domino effect which could lead to the deindustrialisation of Germany, which would be a catastrophe,” she told Spiegel.

She called on the government to safeguard those companies that are under particular threat, due to their high energy usage, “to ensure that they are able to keep a minimum level of their production capacity going, so that when things get better, they can ramp them up again. Those who shut up shop now, will never come back. We need to be clear about that.”

Many companies have done just that: reduced production to an absolute minimum or – in the case of the ArcelorMittal steelworks at the ports of Hamburg and Bremen – are planning to shut down “until further notice”.

The scenario is being repeated across Germany, hitting most of all the energy intensive industries – steel, building materials, glass, paper, chemicals – that form the backbone of the German economy. The “deindustrialisation” which Fahimi fears is what could happen if they close down for good.

Meanwhile, cheaper energy and production costs elsewhere – gas is 10 times cheaper in the US – are driving some businesses to relocate their manufacturing. But in the case of the hundreds of thousands of Mittelstand companies, which are small to medium sized, often family-run concerns and loyal to a specific location which have been Germany’s main growth engine since the second world war – this is barely an option.

According to the Federation of German Industries (BDI), 90% of companies cite the level of energy and raw material costs as either a “strong” or an “existential challenge”. In the case of ammonia – vital to the agricultural industry for the production of fertiliser – producers such as BASF have reduced their production to a minimum and been forced to buy the chemical from cheaper markets elsewhere in the world.

Volker Jung, the head of the bankrupt Hakle toilet paper firm, has called for a state supported energy price cap “otherwise,” he said, “we can ask the question whether Germany will ever be able to afford to make paper again.”

Wolfgang Große Entrup, the head of the German Chemical Association (VCI), has warned of the risk of Germany developing new dependencies at a time when it should be looking to do the opposite.

Another recent survey has shown consumer confidence to be at its lowest since the founding of the Federal Republic of Germany in 1949. Faced with higher energy bills, households are rethinking spending, from holidays to household purchases and meals out.

Businesses are doing the same, avoiding new investments and instead holding crisis meetings about how low they can reduce heating in factories and offices.

Increasing numbers of companies are switching their workers into “Kurzarbeit” – short-time working mode – which was first introduced in the 1920s in response to the economic crisis of the Weimar Republic, and later utilised to considerable effect during the global financial crisis.

This willingness to cling on to workers is seen as crucial if Germany stands a chance of emerging from the current crisis. But increasingly the question is being asked: how long will it be able to afford to do so?

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