LITTLETON, Colo., Jan 31 (Reuters) – Europe’s main industrial engine – Germany – may be entering a recession after its economy shrank in the final quarter of 2022.
The 0.2% quarter-on-quarter contraction in gross domestic product is a shallower decline than many economists had feared in early 2022, when Russia’s invasion of Ukraine sent power prices surging and hobbled German businesses.
Even so, the contraction in such a key manufacturing powerhouse underscores the challenge facing European authorities as they urgently try to revive industries that generate vital jobs and tax revenues but have been hamstrung by record high energy costs for much of the past year.
European power prices have fallen from their 2022 peaks, but remain too far above long-term averages to allow major manufacturers to profitably restore operations to previous levels.
In Germany, by far Europe’s largest manufacturer and exporter, power costs in 2022 averaged over 4 times the 2018-2021 average and at the start of 2023, remain more than twice that average, according to Refinitiv data.
That has put the government under intense pressure to alleviate the strain on industries and households and help rekindle growth.
UNEVEN OUTPUT CURBS
High power prices have had a wide range of repercussions across industries.
Some high profile sectors, such as Germany’s famed car manufacturers, have seen output drop by roughly a third from their long term average as the combination of parts shortages plus surging power costs forced production curbs.
Some more basic sectors, such as chemicals and fertilizer producers, have had to cut production by even steeper margins, with an index of the country’s output of chemicals hitting its lowest since early 2009.
Other major employers, including steel firms and fertilizer makers, have also been forced to aggressively throttle back production.
Germany’s power rationing to key industries, along with more severe capacity cuts in other areas, helped avert a more aggressive economic slowdown in 2022.
But if the economy is to recover momentum in 2023 and beyond, a more comprehensive and sustained increase in output is needed across a wider array of industries.
That will require more abundant and more affordable energy for all consumers.
However, power producers look set to remain constrained in terms of baseload power fuel options, which are necessary to complement the increasing volumes in intermittent renewable energy supplies from solar and wind installations.
Coal has been Germany’s main source of overall and baseload power for decades, but the country has steadily reduced the proportion of power generated from coal from roughly 42% in 2015 to 23% in 2020, according to data from Ember.
Germany’s power producers have also aggressively ramped up power from intermittent renewable sources, with solar and wind generation totals both rising by more than 50% since 2015.
Over the same period, power firms boosted use of cleaner-burning natural gas from 10% to 16.5%, reducing the country’s overall power sector emissions in the process.
Germany’s other sources of baseload power – which can be despatched on command to plug any shortfalls in renewable energy – are nuclear, which provided 12.85% of electricity from 2015-2019, and hydropower dams, which generated around 3% of electricity since 2015.
In 2022, Germany’s power sector was roiled on multiple fronts as gas supplies dried up due to the Russia-Ukraine conflict just as dry conditions reduced hydro power and planned reactor shutdowns curbed nuclear power supplies.
To sustainably resurrect Germany’s power-hungry manufacturing giants, energy producers will need to build out more baseload generation along with renewable power, so that sophisticated production lines receive uninterrupted power at all times – even on cloudy or windless days.
As both coal and natural gas come with heavy emissions tolls and hefty import price tags, utilities and policymakers may look to non-emitting nuclear and hydropower to deliver those baseload supplies.
Nuclear and hydro plants come with plenty of hurdles, including high costs and well organised opposition to both types of installations.
But Germany’s renowned manufacturing economy will not be able to return to its previous dominant position without abundant baseload power.
That means policymakers, utilities and businesses will all need to quickly agree on the best form of that power, or risk additional and potentially deeper economic contractions in the years ahead.
Related columns: Germany energy transition needs faster CO2 cuts from autos, industry
Reporting by Gavin Maguire; Editing by Edwina Gibbs
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