Rising energy prices last year led to Germany in the mild winter cold. Industrial production in Germany fell by 3.1% in December, while the production of chemical products decreased by 11.2%, and the production of pulp and paper – by 7.6% compared to the previous month. High energy and food prices increase the costs of companies and reduce the purchasing power of consumers. A temporary cool spell in mid-December contributed to weak data as construction fell 8% m/m. Overall, industrial production fell 0.6% in the fourth quarter compared to the previous quarter. We expect output to remain weak in early 2023 with a 0.3% qoq decline in GDP in the first quarter, followed by a stabilization in the spring and growth that will gradually gain momentum in the second half of the year. Germany and the eurozone as a whole are coping with the Putin shock better than feared. By the end of 2023, Germany is likely to return to the stronger growth that prevailed until rising energy prices interrupted the post-virus recovery in mid-2022.

However, the evidence tells two very different stories. First, they show a 29% year-on-year decline in December chemicals production. This sector accounts for 7.4% of German industry and 37% of industrial gas use. However, total output (excluding construction and energy) fell just 2.2% year-on-year in December. Losses in the chemical industry were partly offset by gains in the automotive industry. As pressure on the supply chain eased and more parts became available, including semiconductors, the automotive sector began to work to close the backlog.

Gas prices in Germany are likely to remain much higher than in the US and South Arabia for the foreseeable future. Germany is paying the price for its dependence on Russian energy resources. As a result, it is likely to lose about 2-3% of its production capacity in the coming years. Many of the manufacturing processes that have been shut down over the past nine months are unlikely to be reopened in Germany, at least not completely.

However, we do not expect the energy price shock to lead to significant losses in overall production capacity. In the short term, a heavily overvalued US dollar gives a significant cost advantage to all industrial producers in Germany and the Eurozone, which are not very energy intensive. So they have a reason to move part of the production from the US to Europe.

* Mr. Holger Schmieding is an economist at Berenberg Bank.