Supply bottlenecks stifling German industry

The savings rate accordingly dropped steeply and this trend is likely to continue into 2022, albeit slightly less pronounced. Private consumption should recover steadily throughout this year and the next. The pace of recovery in the first quarter 2022 may at times be slower given the uncertainty regarding increased energy prices and the possible impact of the spread of the Omicron variant.

Gross fixed capital formation trended upwards in the first six months of 2021, fuelled above all by full order books resulting from rising demand within Europe and worldwide. The upward momentum was curbed by supply bottlenecks, affecting the automotive industry in particular. The supply shortages will only gradually ease up in the course of this year and 2023. Another downward force is the increasing shortage of skilled labour. These shortages in conjunction with high energy prices and uncertainty surrounding the further course of the pandemic are the main risks facing European industry in 2022. On the positive side, the financing environment continues to be favourable and one-time effects such as the European spending and investment scheme NextGenerationEU will be working in favour of overall economic growth.

Construction activity was already two percent over its fourth quarter 2019 level in the second quarter 2021 and posted a solid performance in the first half of the year. As in the case of gross fixed capital formation, growth here was also curbed by delayed supplies and a shortage of skilled labour. This trend is set to persist into 2022 and, combined with increasing demand triggered through the use of savings, for example, will drive construction and property prices up.

Exports continued to recover in 2021. Exports in the Euro area increased by 9.3 percent last year (ECB 2021a), buoyed by rising global demand for goods and an increase in activity in services such as tourism. Here too, a shortage in supplies and skilled labour capped growth. On the other hand, the moderate devaluation of the euro, particularly against the Euro area’s key trade partners, had a positive impact on exports. Imports are estimated to have increased by seven percent. The trade balance therefore remained in the positive with a surplus of two percent of GDP estimated for 2021 with a similar performance expected in 2022 (ECB 2021a).

Supply bottlenecks stifling German industry

In the last few months, supply bottlenecks have intensified and are having an increasingly negative impact on value added in Germany’s manufacturing sector. At the end of 2021, supply-side shortages affected 70 percent of manufacturing companies. Individual industries that struggled most with shortages in the course of 2021 were the automotive industry (incl. suppliers), mechanical engineering, the metal industry, and large sections of the plastics and chemical industry.

A broad mix of causes

The bottlenecks are the result of a variety of multifaceted factors that are mutually reinforcing. The single biggest factor is the consequences of the Covid pandemic. On the supply side, measures introduced to combat the pandemic (such as regional lockdowns) temporarily reduced production and transport capacities. This has, at times, thrown global supply chains completely off track. At the same time, demand fluctuated heavily resulting in available capacities quickly becoming either under or overutilised.

Structural issues are magnifying the effects of the pandemic. The main factors here are production capacities that are rigid in the short term, the prolonged increase in demand (e.g., for electronic equipment) and an intensifying shortage of skilled labour in the transport sector. There is, for example, a shortage of truck drivers in many European countries. Political factors also come into play here, such as the continuing trade disputes between China and the United States, as do the sharp cyclical fluctuations of the global economy that exacerbate the bottlenecks. Last, but not least, the Chinese government capped the production of some metals by rationing electricity.

Many industries affected

The shortages are affecting many different sectors. The supply-side availability of commodities and intermediate products deteriorated considerably in the course of last year. Almost all categories of commodities important to the manufacturing sector are affected, including, first and foremost, iron, metals and plastics. Commodities central to the twin transformation of the economy (e.g., lithium and cobalt) are also becoming less readily available. The most problematic shortage currently is the lack of semiconductors and chips. The German automotive industry is particularly affected by this bottleneck, also on an international comparison.

Considerable bottlenecks have also built up in the transport sector caused by the pandemic and by extraordinary factors such as the temporary closure of the Suez Canal. These bottlenecks are causing delays in the shipping and road transportation of goods and sharply increasing transport costs. At times, more than ten percent of global container capacities were affected by delays.

Production drops tangibly below normal levels

The shortages are having a major impact on overall economic development in Germany. First, they decisive in bringing production levels down in the second half of the year 2021 despite a solid performance from orders. The supply-side bottlenecks are the dominant force driving the divide between output and incoming orders. Manufacturing output at the end of 2021 would have been between seven to ten percentage points higher without any shortages. This represents a loss in value added of more than 50 billion euros in 2021. The bottlenecks in the automotive industry alone thus brought GDP down by around 1.5 percent in 2021.

Shortages only set to ease in the further course of the year

As the shortages are here to stay in the short term, production levels in the manufacturing sector will only recover gradually in the course of this year. Production will probably not be fully back to prepandemic levels by the end of 2022. Losses to the overall economic value added will continue throughout 2022 and only subside in 2023. Second, the bottlenecks are fuelling the prices of intermediate products and commodities. Price increases in oil, gas and metal commodities were particularly steep due to the demand-side pressure increasing in the second half of 2021 and bumping up against supply that is not elastic in the short term and limited capacities. Despite the current price spikes, the situation on the oil and gas markets should ease up in spring with the changing seasons and increasing supply.

Companies across all sectors are faced with increasing prices. Rising input prices have pushed producer prices up more and more, reaching a rate of over 15 percent in late 2021 which is higher than it has been in many decades. Prices are likely to continue to increase at the beginning of the year on account of the persisting shortages before gradually calming down.

Overall, the problem of bottlenecks is not going to go away any time soon. Alongside continued uncertainty surrounding the further course of the pandemic, the structural causes of the shortages need to be addressed and the current shortages eased. This will require an expansion of supply and transport capacities through increased investment activity to remove present rigidities. This process will require much time and much money. Given this backdrop, the overall situation will only brighten up gradually in 2022 with no tangible improvement likely to set in before the second half of the year. In the medium term, the diminishing impact of the pandemic and an expansion of supply capacities will improve and normalise the overall situation.

New measures in China pose risk for global shipping

The Chinese metropolis Xi‘an has been under a strict lockdown since the end of December 2021, which has also reduced economic activity. This is the most stringent and regionally comprehensive lockdown China has imposed since the outbreak of the Covid virus in Wuhan 2020. The first cases of the new Omicron variant then surfaced at the beginning of 2022 in the port city of Tianjin. A partial lockdown has also been imposed on this urban area.

It is currently not foreseeable to what extent logistic disruptions in Chinese production facilities or partial closures of Chinese ports will impact global supply chains and supplies to Europe in the course of the year. While these lockdowns are likely to affect global supply chains to some extent, major disruptions such as those following the first lockdown in early 2020 are not likely as companies have learnt from their experiences and can now better respond to the measures imposed by the Chinese leadership to combat the pandemic.

There are a series of other factors that could influence the duration and implementation of the lockdown. First, it remains to be seen how strongly and rapidly the Omicron variant spreads in China. The Chinese leadership may well opt to impose measures that are not just more stringent but are in place for longer and across a wider area. If the Omicron variant proves to spread more easily and quickly in China, which is probable, this could cause another chokepoint for global supply chains and drive individual sectors of German industry into recession. Second, the Olympic Winter Games play a role in this equation. The Chinese authorities already started to impose more stringent requirements in the run up to the Olympic Winter Games. It looks like the government will stick to its zero Covid strategy and is prepared to pay the resulting economic costs.

In this context, it is to be expected that further lockdowns will be imposed in China, which will present fresh challenges to producers and exporters and, in turn, the companies at the end of the supply chains. Resulting shortages are also likely to drive prices up further and, with it, inflation. The further course of Covid in China thus represents a risk to the recovery of industry. Companies should therefore already prepare for various scenarios at the beginning of the year and take any precautionary measures available to them.