The German economy is sliding ever deeper into crisis. Under pressure from dramatically rising energy costs and other unfavorable conditions, thousands of companies have gone bankrupt this year alone. We summarize the most important developments and news in this ticker.
10.11.2022 16:52 Uhr
International transport companies warn of severe recession
In economic processes, there are “leading” and “lagging” data. Turnover on commodity markets and at transport companies already indicate developments even before they manifest themselves in production and trade.
Two giants of the international transportation industry, the U.S. transport company FedEx and the major Danish shipping company Maersk, have significantly scaled back their operations.
FedEx, which operates primarily in air freight, has reduced the number of its flights and parked aircraft. The company’s chief financial officer, Michael Lenz, said Tuesday:
“We’ve dropped about 8 or 9 international routes and about 23 domestic routes so far, with the change in the schedule in October. Another 8 or 9 domestic lines will follow in November.”
In September, FedEx had already withdrawn its revenue forecasts for 2022. Meanwhile, its CEO, Raj Subramaniam, even appeared on U.S. television and warned of a global recession.
But it’s not just FedEx that is discontinuing lines. Shipping company Maersk, a giant in container shipping, has also lowered its forecasts for 2022 and expects poorer sales in 2023. The main reason for this is the decline in purchasing power, which in turn lowers demand for transport capacity.
As recently as last summer, demand for container ships was higher than supply; ports in the USA and Europe could not even keep up with unloading ships.
The World Conference on Trade and Development (UNCTAD) has already warned central banks that the aggressive interest rate hikes could trigger an economic crisis. However, the current signs of recession are not yet a direct result of these rate hikes; it usually takes nine months to a full year before such rate hikes show economic consequences. This means that they will not become noticeable until the course of 2023, in addition to the decline in production that has already taken place.
Auction of US government bonds proves skepticism
An auction of U.S. government debt took place on Nov. 9, and it went very poorly. Recently, British and also German government bonds were already hard to sell. In this country, it hit the seven-year Treasury bonds that are supposed to finance the government’s planned energy subsidies.
The auction in the U.S. came as a surprise because three-year bonds had been accepted without any problems the day before. In such auctions, bids are submitted in advance with the interest rate expected. They are then distributed in ascending order of bids, starting with the lowest interest rate. Thus, the interest rate is not set by the provider, but results from the bids.
Another important piece of information is how far the bid exceeds the offer, and how much the interest rate at which the last share was sold exceeds the interest rate at which the first share was awarded.
Interest rates in this latest auction were 4.14 percent, well above last month’s 3.93 percent and the highest since the Lehman bankruptcy in 2008. The difference between the start and end of the auction was 0.034 percent, the widest gap since 2016. Bids were 2.23 times the auctioned volume, which is also the lowest since August 2019.
However, the most important information is the difference between the auction of ten-year government bonds and the completely unremarkable auction of three-year government bonds held before it. This is because this difference indicates that while there is still confidence in the short term, there is doubt about the economic future of the United States in the long term.
Significant drop in industrial orders in September
Germany’s industry suffered a slump in orders in September. According to the Federal Statistical Office on Friday, orders fell by 4.0 percent. According to Reuters, economists had only expected a 0.5 percent drop in orders, following a 2.0 percent drop in August. Compared with the same period last year, the drop in orders was actually 10.8 percent, but the volume of orders in September 2021 had been significantly higher due to “catch-up effects” from the Corona crisis coupled with a shortage of intermediate products.
As the Federal Ministry of Economics added, the catch-up effect after the Corona crisis seems to have ended. According to the ministry, the decline in orders was mainly due to a slump in foreign demand. Although domestic orders were still slightly up, demand from abroad fell by 6.3 percent in the non-euro area and by 8.0 percent in the euro area.
The hardest hit sectors were motor vehicles (-9.0 percent) and mechanical engineering (-8.1 percent). The poor global economy and, above all, the energy crisis are currently affecting industry, as also shown by a recent company survey by the Association of German Chambers of Industry and Commerce (DIHK).
Banks: Real estate loan business collapses
Despite the already significant rise in prices for building materials, banks’ real estate loan business was still at record levels in March; new loans were granted for 32 billion euros. But by August, interest rate increases were already making themselves felt and the volume fell to 18.5 billion. In September, it was then only 16.1 billion, the lowest level since 2014.
Construction companies had already reported a rising number of withdrawn construction orders months ago, but most are still holding on with orders already completed. Trends in lending indicate which construction contracts are not being awarded at all. But it will take a few more months for that to show up as a lack of construction activity.
Real estate loans to private individuals and the self-employed account for 40 percent of total lending. Presumably in view of inflation and interest rates, which quadrupled during the year for ten-year real estate loans, both potential customers and the banks had recently calculated much more cautiously. Many customers are likely to have at least postponed a planned construction or purchase.
However, the current low will not be the end of the road. After the U.S. Federal Reserve raised its key interest rate a few days ago by a further 75 basis points, a corresponding increase by the ECB is imminent. This would mean a five-fold increase in lending rates within a year.
This is a bad outlook for the construction industry. But it could also become a major problem for banks, especially for savings banks that are particularly heavily involved in this sector. For in addition to the slump in new loans granted, which is causing earnings to shrink, there are in all likelihood rising numbers of non-performing existing loans due to the extreme energy costs. And in some regions, the first signs of a bursting real estate bubble can be seen, which could then lead to the value of the loans exceeding the value of the property. At the same time, more and more Germans are tapping into their reserves, causing deposits to decline.
11/8/2022 10:20 p.m.
Uniper and NewMed Energy plan to export gas from Israel to Europe
Uniper and NewMed Energy are considering exporting liquefied natural gas from Israel to Europe. Uniper reported Tuesday in Düsseldorf that a memorandum of understanding had been signed to explore cooperation opportunities in the supply of natural gas to Europe and the development of blue hydrogen (hydrogen produced by splitting natural gas).
The two companies also plan to explore the short-term supply of natural gas via the pipeline between Israel and Egypt to bring gas to Germany via LNG terminals. In addition, the two are planning long-term cooperation in the supply of LNG from the Leviathan reservoir, Israel’s largest natural gas supply site in the Mediterranean.
Automotive supplier Schaeffler cuts 1,300 jobs
Automotive supplier Schaeffler is cutting 1,300 of its 83,000 jobs worldwide, including 1,000 in Germany. The company cited the faster-than-expected transformation of the industry away from the combustion engine and toward electromobility as the reason for this. The Group had already announced the elimination of 4,400 jobs in 2020, but plant closures are not planned this time.
The job cuts, which are to take place by 2026, will primarily affect the sites in Herzogenaurach, Bühl in Baden, and Homburg an der Saar. Remarkably, the job cuts will primarily affect the research and development area, with three quarters of the job reductions attributable to this area. According to the report, jobs are to be cut primarily in research and development of parts for internal combustion engines or from central functions.
Possible halt to deliveries by Vitol – further losses of billions threatened
German taxpayers are facing a further loss of billions of euros: The reason for this is an imminent supply stop by the raw materials trader Vitol, which would affect the former Gazprom subsidiary Gazprom Germania (today: Sefe, under trusteeship by the German government). Sefe has failed with an emergency application before a London court, with which the company had wanted to prevent Vitol from stopping gas deliveries as early as next week.
According to informed circles, Sefe faces losses of around one billion euros if it has to replace the gas at higher market prices. As the former Gazprom subsidiary is being propped up with a credit line of 11.8 billion euros via the state bank KfW, the possible losses represent a further risk for German taxpayers. Vitol raked in a record $4.2 billion profit last year.
As the court order shows, Sefe had asked that Vitol be prevented by injunction from taking actions that could have “immediate and irreparably harmful consequences.” Vitol, on the other hand, argues that it is entitled to terminate supplies at any time because Sefe changed ownership in April.
Ifo Institute: Rise in energy prices costs Germany almost 110 billion euros
The German economy is losing billions of euros due to the rapid rise in energy prices. According to calculations by the Ifo Institute, the combined cost of the energy price shock to Germany is just under 110 billion euros, or about three percent of a year’s economic output. As Timo Wollmershäuser, head of Ifo’s economic forecasts, explained, the economic loss was only higher during the second oil crisis from 1979 to 1981, at four percent.
The corresponding overall economic losses would not have been recovered until five years later. At that time, oil prices fell significantly. In addition, the deutschmark appreciated noticeably against the U.S. dollar, which made energy imports cheaper. Wollmershäuser therefore does not expect the situation to ease any time soon:
“The current decline in real income is likely to persist in the coming years. On the one hand, energy prices are likely to remain permanently high with the loss of Russia as a supplier. For another, Germany’s dependence on imported energy will not change anytime soon.”
The Ifo Institute published its calculations against the backdrop of the current round of collective bargaining in the metal and electrical industries. According to the economists, there will therefore be correspondingly less to distribute to employees in wage and salary negotiations.
Retailers worried about Christmas business
Not even two months before Christmas, the mood in the retail sector is at an all-time low. As shown by the trade association’s index, the mood was only worse in the previous month. The situation is the worst in years since industry records began. Sellers may be hoping for a return of customers before Christmas, but the sharp rise in prices is taking away people’s desire to go shopping.
According to a survey by the Ifo Institute, nearly half of the retailers surveyed reported fewer customers in October than in July. Klaus Wohlrabe, head of Ifo surveys, explained that low-income people in particular can afford less because of high inflation and are reluctant to make purchases. But customers’ reluctance to consume is not the only problem: According to Ifo, three quarters of retailers are still struggling with supply bottlenecks. Food retailers are the most affected, with 90 percent of respondents reporting problems. Among DIY stores, 86 percent did not receive all the goods they had ordered, and toy manufacturers were also concerned, with 63 percent unable to offer the full range. Furniture stores, however, are feeling the crisis the most: 80 percent of the companies surveyed reported that fewer customers were coming.
The trade association is trying to look on the bright side, pointing to a slight increase. The month-long downward trend in consumer sentiment is no longer continuing, according to surveys, people are somewhat more optimistic than recently. The trade association’s assessment is correspondingly cautious:
“There can be no talk of optimism yet. The coming weeks will show whether the reluctance to buy will continue into the Christmas season.”
In the event of a recession, consumption is likely to weaken further.
LNG ships wait off the coast of Western Europe for gas price increases
A fleet of more than 30 LNG tankers is bobbing along off the ports of Western Europe. But this time, it’s not insufficient unloading capacity in the ports of Rotterdam or on the French and Spanish coasts that’s causing the congestion. As the London-based energy market firm Vortexa suspects, gas traders are waiting for better prices for their supplies, which largely come from the USA, Australia and Qatar. Accordingly, they apparently instructed shipping companies to significantly slow down the pace of transport. According to the tracking portal “Vesselfinder”, the ships are sailing at three to eight knots, i.e. not even at half power. The Handelsblatt had previously reported on this.
The amount of liquefied gas currently retained could supply all households in the Saarland with energy for more than five years. According to calculations by the Handelsblatt, the current value of the retained liquefied gas is around 3.4 billion US dollars – but the corresponding profit is obviously not high enough for the gas traders.
The traders’ calculation: if the cargo is not unloaded until December or January, buyers in Europe might be willing to pay higher prices. After the record high at the beginning of the fall, prices for gas on the spot market have fallen significantly, and the gas storage facilities of numerous EU countries are currently almost completely full. However, analysts expect price increases in the range of at least six percent for the months of December and January. Per ship, this would correspond to additional revenue of just under seven billion US dollars. On the futures market, prices could potentially be as much as 30 to 35 percent higher for the months of December and January.
For the traders, therefore, the wait could be financially worthwhile – but only if they were able to negotiate favorable charter rates for the ships in the summer. This is because the rental costs for LNG ships have also risen significantly due to the increasing demand for liquefied gas. In addition, few to no LNG ships are available for the winter, which is being felt above all by Asian countries. Many traders are therefore no longer delivering to Asia. The traffic jam off the Western European coast is therefore likely to continue.