German companies halt production to cope with rising energy prices

German manufacturers are halting production in response to the surge in energy prices caused by Russia’s squeeze on gas supplies, a trend the government has described as “alarming”.

Economy minister Robert Habeck said industry had worked hard to reduce its gas consumption in recent months, partly by switching to alternative fuels such as oil, making its processes more efficient and reducing output.

But he said some companies had also “stopped production altogether”, a development he said was “alarming”.

“It’s not good news, because it can mean that the industries in question aren’t just being restructured but are experiencing a rupture — a structural rupture, one that is happening under enormous pressure,” he said.

He was speaking as Russia halted the flow of gas through the Nord Stream 1 pipeline for three days of planned maintenance. The outage comes with European countries already labouring under drastic cuts in Russian gas supplies that have driven up gas prices to record levels.

German business leaders say the pain from costlier energy inputs is being exacerbated by recent interest rate rises in the US and slowing growth in China, one of Germany’s largest export markets.

Habeck’s comments echoed Siegfried Russwurm, head of the main German business lobby, the BDI, who said this week that gas consumption by industry had declined 21 per cent in July compared to a year ago.

“But that’s often not to do with efficiency gains, but with a dramatic decline in output,” he said. “It is not a success, but the expression of a massive problem.”

Russwurm said the price of electricity for 2023 had risen to more than €700 per megawatt hour, “more than 15 times the level of past years”.

“The situation for many companies is, or soon will be, toxic, not only because of the shortage of gas but mainly because of the ludicrous price increases,” Russwurm said.

Habeck said rising gas prices were affecting everyone from big industrial groups to small trading companies and the medium-sized enterprises that make up the German “Mittelstand”. “Wherever energy is an important part of the business model, companies are experiencing sheer angst,” he said.

He said the business model of large parts of German manufacturing was based on the abundance of gas from Russia that was cheaper than gas from other regions. That competitive advantage “won’t come back any time soon, if it ever comes back at all”, Habeck said.

The pessimism was underscored by a recent survey by one of Germany’s leading economic think-tanks, the Ifo Institute, which showed that German business confidence had fallen for a third consecutive month.

The index, based on a monthly survey of 9,000 companies, slipped to a more than two-year low of 88.5, down from 88.7 last month.

According to a poll published on Wednesday by the DMB, a lobby group representing the Mittelstand, 73 per cent of companies were experiencing “severe strain” from higher energy prices. Asked about the business outlook for the next six months, 10 per cent said their “existence is under threat”.

“Trust in the economic crisis competence of the government is disappearing and small- and medium-sized enterprises in particular feel they have been left alone by the authorities,” said Marc Tenbieg, the DMB’s head.

Business is particularly disappointed at the government’s slowness in stitching together a third package of relief measures to cushion the blow of higher energy prices.

The cabinet, led by chancellor Olaf Scholz, held a retreat this week at Schloss Meseberg, a government guesthouse outside Berlin, and there had been widespread expectations that it would unveil at its conclusion a number of new measures. But Scholz said at the final press conference that it was not yet ready.

Finance minister Christian Lindner insisted, however, that the next package of measures would be “massive”, amounting to the “single-digit billions” for this year and “double-digit billions” for 2023.

The two previous relief packages introduced in the aftermath of Russia’s invasion of Ukraine had together been worth €30bn.

Lindner demanded reforms of the electricity market, where high gas prices were causing an automatic increase in electricity prices, which was delivering windfall profits to some energy providers.

Echoing Lindner, Habeck said it was a question of “eliminating the cause” of higher energy prices, not just softening their effects.