German economy does not get out of crisis mode

white and brown concrete building

More than two years of pandemics and the energy crisis triggered by the war in Ukraine are causing permanent stress in the German society and the economy. The drought in summer and the low water levels of the Rhine and other rivers added to these problems. The already foreseeable decline in economic output in the third quarter of 2022 will probably be somewhat higher than recently expected due to the transport bottlenecks caused by the low water levels. A decline of half a percent would no longer be a surprise. For 2022 as a whole, economic growth is not expected to exceed 1.5 percent. In particular, many deliveries are delayed because ships on the Rhine can often only be loaded to less than half their capacity. It is true that less than ten percent of all goods transported in Germany are carried by inland waterway vessels. However, the goods transported on the Rhine, such as coal, oil or chemicals, play a central role for the German economy. The situation has recently eased a little – it is to be hoped that the rain will continue to fall regularly. The negative impact on the German economy is likely to be felt overall, albeit not dramatically.

However, this should not obscure the fact that the effects of climate change are becoming increasingly apparent and are impacting the economy. Extreme weather events such as long periods of drought, heat waves or, conversely, extensive rainfall with associated flooding will in all likelihood continue to increase. Plans to significantly reduce greenhouse gas emissions can only slow global warming, not stop it. The costs of climate change are likely to be increasingly felt in the economy as a whole, dampening growth in gross domestic product.

This summer’s drought also highlights an important aspect of global warming: the more frequent occurrence of extreme weather events is increasingly amplifying the effects of other negative events. At the moment, for example, capacity bottlenecks on the Rhine are exacerbating the energy crisis because coal and oil cannot be transported in the usual quantities. The drought is also exacerbating problems in many supply chains that arose in the wake of the Corona pandemic and the Ukraine war. A striking example is the increased demand for grain transport vessels on the Danube caused by the war, which coincides with higher demand for such vessels on the Rhine, where a single one can only be partially loaded. Last year, the pandemic and an extreme weather event already contributed to the supply bottlenecks for semiconductors: for example, the pandemic led to a huge increase in demand for electronic equipment and cars. At the same time, production capacity for semiconductors was limited – not only, but also because of an extreme winter event in Texas that temporarily halted production there.

There are indications that extreme weather events will occur more frequently in the future together with other negative events. We must assume, for example, that the geopolitical tensions with Russia and China will continue. The conflict over Taiwan in particular shows us how strongly we are dependent on semiconductor production there. It is important that we as a society become even more resilient in order to deal with such events and the advancing climate change. Supply chains will probably become more and more diversified. And in Germany and other countries, there is a huge backlog of infrastructure needs. The energy crisis is a particularly striking illustration of the huge costs of the energy turnaround, which has been delayed for years. The pandemic has made clear to us the gaps in digitization or in education. And there is obviously a need, in some cases considerable, for investments in the Rhine, for example, that can reduce the impact of droughts on shipping in particular.

It is impossible to fully prepare for crises, that is in the nature of things. To be sure, there is no denying that the German economy has been robust in recent crisis years despite all the problems. But that is no reason to rest on one’s laurels; the challenges are greater than ever. This makes it all the more important to quickly achieve the transformation to a climate-neutral and digital economy.

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