German industry's order book at an all-time record level
Record-Low Rhine Water Levels Pose Economic Threat to Germany
In 2023, Germany is grappling with the impact of record-low water levels on the Rhine, a crisis exacerbated by an extreme heatwave and drought conditions. This has significantly reduced cargo ship capacities, leading to increased shipping costs and disruptions in transport, agriculture, and ecosystems.
The low water levels and high temperatures have forced restrictions on water use, including for industrial cooling, further limiting operational capacity and potentially causing economic difficulties. Cargo operators have had to impose surcharges as high as 100% due to reduced loading volumes, adding to cost pressures.
These physical constraints have contributed to a cascade of economic effects. Higher logistics costs, delays in supply delivery, and strained water-dependent sectors like agriculture and manufacturing are causing notable economic strain. The International Commission for the Protection of the Rhine has emphasized the increasing frequency of such low water events and the critical need for cross-border cooperation to manage water use and mitigate economic impacts in the future.
The situation is further complicated by other economic factors. Economists from DekaBank, Commerzbank, and Deutsche Bank now expect the economy to shrink by up to minus one percent in the whole of 2023. Most economists now expect a decline in economic output in the third quarter, which is likely to continue into the fourth quarter. After a plus of 0.8 percent in the first quarter of 2022, the gross domestic product stagnated in the second quarter.
The Ukraine war, high inflation, and expected further interest rate hikes are further dampening economic development in Germany. Many companies are having problems fulfilling orders due to disrupted supply chains. The BDI warns of serious consequences, including supply bottlenecks, reduced production, short-time work, and an exacerbation of the energy crisis.
In a concerning development, the ZEW Index fell unexpectedly sharply in August, to minus 55.3 points. Economists had expected a slight increase, but it decreased instead. The Federal Statistical Office reported a record-high order backlog in industry in the current month, with a 0.5 percent increase compared to the previous month and a 14 percent increase compared to the previous year.
However, this high order backlog could be a double-edged sword. On one hand, it indicates strong demand for goods and services. On the other hand, if companies cannot fulfill these orders due to supply chain disruptions, it could lead to customer dissatisfaction and potential long-term damage to business relationships.
German households could lose 70 billion euros in purchasing power in 2023 due to higher energy prices alone, in addition to the 70 billion euros already expected in the current year. A gas surcharge for all consumers from October, at 2.419 cents per kilowatt hour, will further reduce household purchasing power.
The BDI warns that prolonged drought and low water levels threaten the supply security of industry. If the situation persists, it could lead to supply bottlenecks, reduced production, short-time work, and an exacerbation of the energy crisis. The situation is a stark reminder of the interconnectedness of our economy and the environment, and the need for sustainable solutions to address these challenges.
As new rainfall is expected to raise the water levels, there is hope that the situation may improve. However, the long-term outlook remains uncertain, and it is crucial for policymakers, businesses, and individuals to prepare for potential future crises and work towards a more resilient and sustainable economy.
The low water levels on the Rhine, impacting cargo ship capacities, could potentially cause economic difficulties in business sectors, particularly in logistics and water-dependent sectors like agriculture and manufacturing.
Surcharges imposed by cargo operators due to reduced loading volumes and increased shipping costs are contributing to economic strains, adding to the challenges faced by Germany's economy in 2023.
