Disrupted supply chains, expensive raw materials, production stoppages. Putin’s war is producing a dangerous mix of inflation and stagnation in our country, as it was last seen in the seventies. by Dirk Mewis
After two years of pandemic, Germany and Europe are lurching into the next economic crisis. First came the military, then the energy shock. In 1973 it was the Yom Kippur War, the consequences of which caused oil prices to quadruple within weeks. Now it is Russia’s attack on Ukraine. This time it is not only oil but also gas, the prices of which have skyrocketed sevenfold since the Russian army invaded. Extreme cost shocks are looming. “The combination of rising energy prices, possible supply disruptions in industry and growing uncertainty is weakening the economy and causing inflation to rise,” warns Clemens Fuest, President of the Munich-based Ifo Institute.
A term is doing the rounds that many only know from history books: Stagflation. It refers to an economic poison cocktail of stagnating growth and high inflation. The Ifo boss recognises parallels to the oil shocks of the 1970s, the last time the world economy had to struggle with stagflation. The economic malaise dragged on for years and paralysed not only Germany. For the European Central Bank (ECB), such a scenario would be the worst case. Actually, the monetary guardians from Frankfurt’s Ostend had set everything up to get out of the crisis policy with which they have been propping up Europe’s economy for ten years. The massive purchase of government and corporate bonds, with which the ECB is pushing down interest rates and making it easier to take on debt, should come to an end soon. A first rate hike may follow towards the end of the year to contain inflation.
Vulnerable to local crises
Joachim Nagel, the new president of the Bundesbank, warned only recently that another surge in energy prices would be reflected in consumer prices. The central bank will probably have to raise its inflation forecast for Germany again this year. In February, it had still expected an inflation rate of 4.5 per cent, in the meantime it is five per cent.
At the same time, the war is fuelling a development that began in the pandemic and will continue to fuel inflation: deglobalisation. In the past decades, production based on the division of labour and the global networking of national economies were considered a guarantee for growth, prosperity and low prices. But if the failure of a medium-sized supplier in Ukraine is now enough to paralyse car production throughout Europe, it shows how susceptible the global economy has become to local crises.
For example, the chemical giant BASF generates only one percent of its sales in Russia, and Ukraine even accounts for only 0.2 percent. But BASF needs gas on a large scale, also from Russia, to generate electricity and steam, which are needed for the production of many chemicals, or to produce ammonia, acetylene and hydrogen.
Already in 2021, the additional costs due to increased gas prices for the European locations amounted to around 1.5 billion euros. The Group passed some of this on to its customers. And at the presentation of the balance sheet, just the day after the Russian attack, Group CEO Martin Brudermüller announced that he would “implement further significant price increases”. Through chemical companies like BASF, whose substances are used in countless products, rising gas prices are likely to further fuel inflation.
Customers are paying for expensive pre-products
And almost 80 per cent of local companies that are internationally active reported problems, some of them significant, in their global supply chains even before the Russian invasion of Ukraine. In a survey conducted by the Association of German Chambers of Industry and Commerce, 90 percent said they were suffering from higher prices for intermediate products, 71 percent of which were passing the price increases on to their customers.
A look at the transport routes shows how disrupted and expensive the global flow of goods already is. Ships are fully booked for months, which is why semiconductors and rapid tests had to be shifted toair transports from China to the West; the prices for air freight are therefore up to three times higher than before the pandemic.
The international sanctions and the closure of Russian airspace to airlines from 36 countries do not make transport cheaper. Many Western airlines now have to fly around Russian airspace via Turkey,Azerbaijan and Turkmenistan, for example, which increases flight times by up to two hours and gobbles up more paraffin.
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