German industry warns of output cuts due to high energy costs

The Association of German Chambers of Commerce and Industry warned on July 25 that 16% of industrial companies it had surveyed in the country felt forced to cut production or at least partially wind down some business areas in response to the soaring cost of energy.

Around a quarter of the companies in question have already curtailed their operations, while another quarter are in the process of doing so and the remaining half are still planning their response. Energy-intensive industries are unsurprisingly hardest hit, with 32% either having reduced their activities already, in the process of doing so or with such steps in their contingency plans.

"These are alarming numbers," the association's president Peter Adrian said in a statement. "They show how strongly permanently high energy prices are a burden on our situation. Many companies have no choice but to close down or relocate production to other locations."

The German economy is hurting not only as a result of high energy costs but also reductions in Russian gas supply, which has forced companies to buy more high-priced volumes on the spot market. The association noted that only half the industrial companies polled had contracts in place to cover their gas needs this year, and that more than a third still need to buy over 30% of their estimated requirement for 2022. 

"Due to the current situation on the energy markets, there is a considerable cost and supply risk for companies in the coming months," Adrian continued. "Many companies are currently finding that they cannot pass on the price increases they have experienced to a sufficient extent to customers due to direct or indirect international competition."

With fears increasing that Russia could shut off gas supply completely to Europe, the European Commission has called for member states to cut gas consumption by 15% from August, and the proposal is due to be discussed by energy ministers in Brussels on July 26. Germany is the main proponent of the measure, and itself is targeting a cut in consumption of 15-20%. The IMF has warned that the country is at risk of losing 4.8% of its economic output if Russia does shut down supplies.

Meanwhile, the Ifo Institute's business sentiment survey published on July 25 showed that the country's business confidence fell to its lowest level in more than two years in July, with high energy prices and the risk of gas shortages putting Europe's largest economy on the brink of a recession.