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German Production Falls as Higher Energy Prices Hit Manufacturing

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German factory output fell in August, driven by cutbacks in energy-intensive industries as costs surged following reductions in the supply of natural gas from Russia.

With separate figures showing a sharp drop in new orders during the month, and retail sales also falling, the outlook is for further declines in one of the world’s industrial powerhouses as the global economic damage caused by the Kremlin’s decision to invade Ukraine continues to mount.

So far this year, businesses have borne the brunt of energy price rises in Germany and are responsible for most of the savings in gas consumption, with household usage up from last year in recent weeks.

The cost of the war for manufacturers will partly depend on government measures to limit the price of energy for businesses and consumers, which were announced late last month but which have yet to be set out in detail.

The same is true for Europe as a whole, with the fate of the economy largely resting on the availability of alternatives to Russian gas and the continent’s ability to avoid energy rationing.

“The story is totally dominated by what’s going to happen to gas, gas supply and fiscal policy response to gas,” said

Olivier Blanchard,

formerly the International Monetary Fund’s chief economist and now a fellow at the Peterson Institute for International Economics. “There is enormous uncertainty.”

With gas stores in Germany now more than 92% full according to this week’s government figures, few experts expect the country to run out of gas this winter barring a prolonged cold spell, but high prices are likely to endure and supplies for next winter aren’t guaranteed.

A fall in new orders for German factory-made goods was sharper among domestic buyers than overseas customers.



Photo:

Gregor Fischer/Getty Images

Germany’s statistics office Friday said industrial production was 0.8% lower in August than in July, and down 2.9% from February, when Russia’s war on Ukraine began. Manufacturing plays a bigger part in Germany’s economy than in many others that rely more on services and consumption.

Since ordering the invasion of Ukraine in February, Russian President

Vladimir Putin

has used his country’s vast stores of energy as leverage to undermine European support for Kyiv. In September, Russia turned off the taps to a key natural-gas pipeline, Nord Stream.

Last week, gas leaks from that pipeline and its closed twin pipeline, Nord Stream 2, following detonations registered on seismographs raised fears about a possible sabotage operation and prompted questions about the security of Europe’s energy infrastructure.

Higher gas prices have made it difficult for some energy-intensive industries to make and sell their products at a profit, leading to cutbacks in output. In its release Friday, the statistics office, Destatis, said output in a range of sectors that use a lot of energy—chemicals, metals and ceramics—was down 2.1% from July and 8.6% since February.

Western leaders are preparing for the possibility that Russian natural gas flows through the key Nord Stream pipeline may never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang

In a separate release Thursday, the statistics office said new orders for factory-made goods fell 2.4% in August from July, with German rather than overseas buyers cutting back most sharply.

“Today’s data are like a sneak preview of more to come,” wrote

Carsten Brzeski,

an economist at ING Bank, in a note to clients. “High energy prices will increasingly weigh on private consumption and industrial production, making a contraction of the economy inevitable. The only question is how severe such a contraction or recession will be.”

In France, by contrast, factory output rose by 2.7%, having declined in July, partly reflecting a recovery in the production of motor vehicles as shortages of semiconductors and other inputs eased. The eurozone’s second-largest economy has capped energy prices for many businesses since the early months of the war, and last month announced additional help that will extend into 2023.

Europe isn’t alone in seeing a weakening of its industrial sector. Global factory output fell during the three months through June as many of China’s big industrial cities faced lockdowns designed to contain the Covid-19 pandemic, and weakness in the world’s second-largest economy has damped activity in factories across East Asia. As a result, world industrial production fell again in July.

Write to Paul Hannon at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


German factory output fell in August, driven by cutbacks in energy-intensive industries as costs surged following reductions in the supply of natural gas from Russia.

With separate figures showing a sharp drop in new orders during the month, and retail sales also falling, the outlook is for further declines in one of the world’s industrial powerhouses as the global economic damage caused by the Kremlin’s decision to invade Ukraine continues to mount.

So far this year, businesses have borne the brunt of energy price rises in Germany and are responsible for most of the savings in gas consumption, with household usage up from last year in recent weeks.

The cost of the war for manufacturers will partly depend on government measures to limit the price of energy for businesses and consumers, which were announced late last month but which have yet to be set out in detail.

The same is true for Europe as a whole, with the fate of the economy largely resting on the availability of alternatives to Russian gas and the continent’s ability to avoid energy rationing.

“The story is totally dominated by what’s going to happen to gas, gas supply and fiscal policy response to gas,” said

Olivier Blanchard,

formerly the International Monetary Fund’s chief economist and now a fellow at the Peterson Institute for International Economics. “There is enormous uncertainty.”

With gas stores in Germany now more than 92% full according to this week’s government figures, few experts expect the country to run out of gas this winter barring a prolonged cold spell, but high prices are likely to endure and supplies for next winter aren’t guaranteed.

A fall in new orders for German factory-made goods was sharper among domestic buyers than overseas customers.



Photo:

Gregor Fischer/Getty Images

Germany’s statistics office Friday said industrial production was 0.8% lower in August than in July, and down 2.9% from February, when Russia’s war on Ukraine began. Manufacturing plays a bigger part in Germany’s economy than in many others that rely more on services and consumption.

Since ordering the invasion of Ukraine in February, Russian President

Vladimir Putin

has used his country’s vast stores of energy as leverage to undermine European support for Kyiv. In September, Russia turned off the taps to a key natural-gas pipeline, Nord Stream.

Last week, gas leaks from that pipeline and its closed twin pipeline, Nord Stream 2, following detonations registered on seismographs raised fears about a possible sabotage operation and prompted questions about the security of Europe’s energy infrastructure.

Higher gas prices have made it difficult for some energy-intensive industries to make and sell their products at a profit, leading to cutbacks in output. In its release Friday, the statistics office, Destatis, said output in a range of sectors that use a lot of energy—chemicals, metals and ceramics—was down 2.1% from July and 8.6% since February.

Western leaders are preparing for the possibility that Russian natural gas flows through the key Nord Stream pipeline may never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang

In a separate release Thursday, the statistics office said new orders for factory-made goods fell 2.4% in August from July, with German rather than overseas buyers cutting back most sharply.

“Today’s data are like a sneak preview of more to come,” wrote

Carsten Brzeski,

an economist at ING Bank, in a note to clients. “High energy prices will increasingly weigh on private consumption and industrial production, making a contraction of the economy inevitable. The only question is how severe such a contraction or recession will be.”

In France, by contrast, factory output rose by 2.7%, having declined in July, partly reflecting a recovery in the production of motor vehicles as shortages of semiconductors and other inputs eased. The eurozone’s second-largest economy has capped energy prices for many businesses since the early months of the war, and last month announced additional help that will extend into 2023.

Europe isn’t alone in seeing a weakening of its industrial sector. Global factory output fell during the three months through June as many of China’s big industrial cities faced lockdowns designed to contain the Covid-19 pandemic, and weakness in the world’s second-largest economy has damped activity in factories across East Asia. As a result, world industrial production fell again in July.

Write to Paul Hannon at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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