SUERF Policy Note Germany: a case of long-covid?*

Before we delve deeper into the underlying factors behind this weakness, it is noteworthy that the growth divergence seen since the pandemic is to some extent more a catching up of the other countries when viewed from a longer time horizon as the German economy had been growing relatively strongly in the years prior to the pandemic (see Chart 1). [...] The costs of energy, especially natural gas, have seen a lasting upward shift in Germany on the back of the loss of Russian gas, but also the shift towards renewables (and the shutting down of the remaining nuclear plants).1 Future markets indicate that electricity prices in Germany will be at least twice as high as prior to the pandemic in the coming years (see Chart 102). [...] SUERF Policy Note, No 362 7 Germany: a case of long-covid? The role of economies of scale and the risk of shrinking industrial clusters The changed global environment and the lasting rise in energy costs pose a genuine challenge for the German industrial sector and thus the whole economy.6 F. [...] Thus, a crucial question for the outlook of the German manufacturing sector is whether the current shocks will lead to an erosion of the economies of scale as corporate investment fails to keep industrial clusters intact? After being broadly stable for three decades, the share of manufacturing in the economy has started to decline since 2018 (see Chart 16). [...] With this in mind, we built a so-called SVAR model of the German economy to better understand the dynamic response of the German economy to a negative supply shock.9 We define a negative supply shock as a shock that will reduce output, wages and raise prices as the capacity of the economy is adversely impacted by the shock.