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(Bloomberg) — In Germany, some industrial furnaces have been running without interruption for decades. If they cool down suddenly, the molten materials harden and the system breaks.
That’s the kind of concern sweeping through Europe’s largest economy as it faces an unprecedented energy crisis.
What started as vague foreboding over reduced supplies of Russian gas is now very real. After President Vladimir Putin slashed flows on the main link to Europe by 60%, experts in Chancellor Olaf Scholz’s administration this week worked out the scenarios and none of them led to sufficient reserves to make it through the winter.
“That was the sobering moment,” Klaus Mueller, who heads Germany’s network regulator known as BNetzA, said Friday in an interview with Deutschlandfunk radio. “If we have a very, very cold winter, if we’re careless and far too generous with gas, then it won’t be pretty.”
The risks extend beyond beyond a recession, and a winter of freezing homes and shuttered factories. For decades, Germany has prospered off the back of cheap gas. The answer to the growing economy’s needs more often than not was a new pipeline to Russia.
That era is now over, and companies from BASF SE to Volkswagen AG are coming to terms with the new reality.
There will be quick fixes — like reviving polluting coal plants and switching fuels in industrial processes — but structural issues loom as the transition to affordable renewable power will still take years.
Firms making metals, paper and even food could be forced to downscale or close German production sites, accelerating a steady exodus of manufacturing jobs and leaving lasting damage to the country’s economic landscape.
“Companies will move production to where there’s competitive pipeline gas, and this won’t be in Germany,” said Wolfgang Hahn, managing director of Energy Consulting Group GmbH. “You can’t correct 20 years of policy errors in two or three years.”
The latest figures show that it would take 115 days to reach the government’s target of filling gas reserves to 90% capacity by November. That time frame assumes flows remain at the current level, which is unlikely given the Kremlin’s increasingly aggressive posture toward Europe in retaliation for sanctions imposed over Russia’s war in Ukraine.
In response to the grim prospects, Germany — which still relies on Russia for more than a third of its gas supplies — elevated its threat level to the second-highest “alarm” stage on Thursday. If the squeeze gets tighter, Germany could start rationing supplies.
The moment of truth is likely to come next month, when the Nord Stream pipeline goes down for scheduled maintenance. Germany worries it may never come back.
“I would have to lie if I said I didn’t fear that,” Economy Minister Robert Habeck said Thursday in an interview with public broadcaster ZDF.
Germany’s vice chancellor drew a parallel between the gas squeeze and the role of Lehman Brothers in triggering the financial crisis. If energy suppliers continue to pile up losses by being forced to cover missing Russian supplies at high prices, there’s a risk of a broader collapse.
Uniper SE, Germany’s largest Russian gas importer, has already warned it may face difficulties fulfilling supply contracts to local utilities and manufacturers if Moscow prolongs or increases gas cuts.
The crisis has already spilled far beyond Germany, with 12 European Union member states affected and 10 issuing an early warning under gas security regulation. Europe’s increased demand for liquefied natural gas will also hit poorer nations around the world as they struggle to compete for cargoes.
“We are worried” that Russia will cut off gas supplies to Europe, Estonian President Kaja Kallas said at the EU summit in Brussels on Friday. “We need to be prepared to have different energy mixes, united purchases of liquefied gas and do these things together.”
Read more: Europe Must Declare a War Economy: Andreas Kluth
Scenarios from BNetzA, which would manage Germany’s gas distribution in the event of rationing, take into account a series of emergency measures, including two floating LNG terminals that will come online this winter, auctions of excess fuel for industry and a 15 billion-euro ($15.8 billion) government program to buy gas on the spot market.
“Storage sites in Germany need to be filled as soon as possible,” said Sebastian Bleschke, head of INES, the association of German storage operators. “For some sites, the window of opportunity is closing.”
Bavaria-based Wiegand Glas shows the difficulty of unwinding Germany’s gas demand. The company’s 11 glass-melting furnaces — like all those in the country — operate 24 hours a day for more than a decade. Even if Wiegand idled production, the furnaces would need 75% of normal gas consumption to prevent the molten glass inside from seizing up and destroying the furnace.
“But then we have to carry the energy cost while we have nothing to sell, so this is not really an option,” Chief Executive Officer Oliver Wiegand said in an interview. If the highly-specialized furnaces break, rebuilding would be time-consuming and expensive. “It would take a decade to build up to normal production again,” he added.
Economists are trying to pin down the scope of the risk, but it’s a challenge. European Central Bank President Christine Lagarde said 75% of what the bank got wrong in its inflation prediction last year was due to energy prices.
German economic institutes warned in April that an immediate halt to Russian imports of oil and natural gas would cause a 220 billion-euro hit to output over the next two years. While it could be more benign now as storage levels tick up, predicting the outcome of an unprecedented situation is difficult, said Stefan Kooths, an economist at the Kiel Institute for the World Economy, who was involved in the forecast.
The Bundesbank estimates that Germany’s economy will shrink more than 3% in 2023 if Russian energy supplies stop. That would be the worst slump outside of the recessions sparked by the Covid-19 pandemic and the global financial crisis.
The outlook is already grim. Manufacturing orders at factories have fallen for the past three months, costs are rising and confidence is crumbling. The Ifo Institute’s closely watched measure of business expectations unexpectedly dropped this month.
For now, companies are bracing for a prolonged reduction in energy. BASF, Europe’s biggest chemicals maker, may cut output because of the rising cost of gas, which is used as a feedstock in production and to generate electricity. BMW AG, the world’s biggest luxury-car maker, may buy electricity rather burn gas in its own on-site power plants.
“We could switch some production from gas to oil if needed, but it would be five-times less efficient,” Hagen Pfundner, head of the German operations of Swiss drugmaker Roche Holding AG. “That would not be a durable solution.”
Germany is preparing consumers and businesses for tough times ahead. BNetzA’s Mueller warned that households could face doubling or tripling of their gas bills and called on people to save money and energy. Habeck appealed to Germans sense of solidarity to fend off Putin’s energy attacks.
Responding to the suggestion of a state bonus for saving gas, he said: “If someone says ‘I’ll only help if I get 50 euros more,’ I’d say ‘you’re not getting it, dude.’”
- Germany Warns of Lehman-Like Contagion From Russian Gas Cuts
- Gas Rationing Is Getting Closer for Europe
- The Weakest Link in Germany’s Energy Security Is Fraying
- Germany Girds for Day of Reckoning in Russian Gas Showdown
©2022 Bloomberg L.P.
In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later – The New York Times
For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.
“There is nothing to cut back on,” she said.
Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.
And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.
“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”
Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.
That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.
In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.
“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”
America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.
But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.
The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.
But job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.
“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”
Lower-income people are already hurting. Mr. Brown’s organization has seen more requests for help in recent months, he said, as local families fall behind on their bills. The size of the typical request has gone up, too, from a few hundred dollars to a few thousand. And he has noticed financial pain creeping up the income spectrum.
Mr. Brown’s observations are backed up by government data: About 12 percent of households reported they were struggling to get enough to eat in early July, up from about 10 percent at the beginning of the year, according to the Census Bureau.
Families can’t easily cut back what they spend on rent, gas or electricity as those prices climb, said Brian Greene, chief executive of the Houston Food Bank, which provides food to Mr. Brown’s organization and other charities across the region. So they cut back on food.
“Food insecurity isn’t about food,” Mr. Greene said. “Food insecurity is about income.”
Many poorer families’ incomes held up relatively well early in the pandemic because government aid — expanded unemployment benefits, stimulus checks and other programs — helped offset lost wages when businesses shut down. Then, as the economy reopened, pay soared for restaurant workers, delivery drivers and other low-wage workers.
But pandemic aid programs have ended and wage growth is slowing in many sectors — average hourly earnings in leisure and hospitality, which rose rapidly last year, actually fell in July from a month earlier for rank-and-file workers. Prices have risen so fast that even unusually quick wage growth has failed to keep up.
The gaping divide between the rich and the poor in this inflationary moment is clear in corporate earnings calls. At Boot Barn, a Western wear retailer, sales of men’s Western boots were down in the first quarter, but sales of higher-priced exotic skin boots picked up. At LVMH, which owns luxury brands like Louis Vuitton and Tiffany, American revenues have been growing strongly, while at Walmart, customers are pulling back as they struggle to afford basic necessities, particularly food, which has run up sharply in price.
“This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel,” Walmart said in its July 25 guidance.
It’s not just apparel: Consumers across the economy are buying less milk and fewer eggs, as prices for those products rise significantly, according to an analysis of government figures by Michelle Meyer, chief U.S. economist for Mastercard. Yet they are also going out to eat at restaurants more often.
The fissures are clear in the car market. Demand for new cars, which generally sell to higher-income buyers, has remained strong and prices continue to soar amid supply shortages — putting upward pressure on inflation. But used-car demand is ebbing and prices have begun to depreciate again.
“We see bifurcation in many parts of the economy and the auto market,” Jonathan Smoke, chief economist at Cox Automotive, said in an interview. “The new vehicle buyer has shown much less price sensitivity.”
Housing is another realm where fates have diverged. Home costs have run up sharply since the pandemic and mortgages are now more expensive, making buying unaffordable for many families. Because would-be buyers can’t afford homes, they are renting, keeping apartments for lease in short supply and pushing rents ever higher. Those soaring rents hit lower-income households especially hard: Roughly six in 10 people in the bottom quarter of earners rent their homes.
By contrast, homeowners have both seen their houses rise in value and often enjoy a built-in inflation hedge, since many refinanced their mortgages and locked in low monthly payments when rates were low in 2020 and 2021.
“The haves are really comfortable right now,” said Nicole Bachaud, an economist from Zillow, also noting that “we’re going to see this gap getting wider between people who are homeowners and people who are probably never going to be homeowners.”
Ms. Clarke, the New Canaan retiree, recently got off the wait list for an affordable apartment for herself and her 24-year-old daughter, who has autism and cannot work. Their new unit has just one bedroom, but it is clean and has new appliances, and at about $1,350 a month, she can squeeze it into her budget.
The lease lasts only a year, however, and Ms. Clarke is worried about finding somewhere to live if it isn’t renewed. Even now, she is barely making ends meet: She lost her car keys recently and had to spend nearly $500 replacing them, wiping out nearly all her small rainy-day fund and leaving her one crisis away from financial disaster.
“When you don’t have money, you’re on a fixed income, you’re constantly thinking, ‘Well, maybe I shouldn’t have bought that,’” she said. “There’s no cushion. There really never was.”
More financially secure families also face headwinds, of course, which could eventually prompt them to slow down spending. The cash savings they built up during the pandemic won’t last forever, and rising prices could prompt many households to pull back their spending.
And swooning stock markets could prompt richer families, who tend to have more money invested, to spend less than they otherwise would. Some economists think that the people in this demographic have mostly kept spending recently — despite their falling economic confidence — because they are eager to take vacations that they had put off earlier in the pandemic.
“Where I’m budgeting, it’s to make room for travel,” said Mr. Trevino of Los Angeles. “I feel like I’ve missed out on that a little bit.”
Economists have speculated that richer consumers’ resilience could fade as autumn approaches and they take stock of their finances amid a slowing economy. But for now, the reality that America’s wealthier consumers have yet to sharply pull back in the face of rising prices may be setting up a tough road ahead for the nation’s poorer ones.
“We really, in a way, haven’t noticed the inflation very much,” Mr. Schoenfeld said. “This economy is very unfair.”
Jason Karaian contributed reporting.
Posthaste: Sorry, but the economy isn't over COVID — and won't be for some time – Financial Post
A lot of weird things have been happening in our economy lately. Roaring inflation that took everybody by surprise, a drum-tight labour market and now the prospect of sputtering growth, if not outright contraction.
The explanation for these unexpected and in some cases unprecedented conditions, argue CIBC economists, is that COVID continues to disrupt the functioning of the economy.
Canada, the U.S. and Europe have tried to move on from the pandemic, lifting vaccine mandates and restrictions on activity, thus resulting in an increase in consumer demand.
“But COVID isn’t fading away as a supply constraint, or as a health issue,” CIBC economists Avery Shenfeld and Andrew Grantham wrote in a recent note.
Variants that spread more rapidly have meant that more people have died of COVID in 2022 than the previous year, even though fewer cases were fatal, they said.
And while demand has recovered, supply chains have not, partly because of the war in Ukraine, but also because of COVID.
The lockdowns this year in China are the most obvious example. Omicron restrictions here caused exports to fall even more than during the first 2020 lockdown.
In Canada it is showing up in employee illness. “Flights are cancelled when crew members call in sick, hospitals cut back services because staff members are ill and live entertainment shows are postponed for the same reason,” wrote the economists. Omicron has been associated in Canada with a significant increase in working hours lost to illness.
Long COVID has caused some to actually withdraw from the workforce. The numbers are small in Canada, they said, but the U.K. serves as an example of what could happen if we fail to control future waves of the virus.
In Britain, where public health restrictions have been lighter, 0.6% of the population have been “severely affected” by Long COVID, according to a recent study.
COVID is also impacting capital spending, said the economists. An uncertain outlook due to potential waves of the virus in future may be contributing to businesses’ reluctance to spend, but COVID supply-chain issues have also made getting capital equipment more difficult as well.
“The result is less production capacity in sectors where equipment is on back order, or where COVID uncertainties have forestalled investment,” they said.
The unprecedented COVID recession and recovery is also why there is a mismatch between job availability and hiring in the economy today, argue the economists.
During the pandemic some work was almost completely shut down and stayed dormant for a long period. Now that the economy has reopened, those employers are scrambling to rehire in great numbers, a situation we have not seen before, they said.
“A typical recession doesn’t see air travel drop by 90% and doesn’t see live theatres close outright. A typical recovery doesn’t see the sudden opening we’re experiencing in these same sectors,” they wrote.
Workers who held these jobs, like restaurant staff and baggage handlers, in 2020 had two years to move on, unlike a typical recession that lasts just two or three quarters.
CIBC believes this mismatch will eventually even out, but the impact of COVID on supply chains and missed work could remain.
So what does the future hold?
While traders are already talking about rate cuts after the hiking cycle winds up either at the end of this year or early 2023, CIBC sees the Bank of Canada keeping rates at 3.25% through the whole of 2023.
It also sees GDP growth slowing to 0.9% in the fourth quarter of this year and gaining only 1.5% in 2023.
“Even if a recession is avoided, we’re in for a protracted period of sub-par growth,” said the economists.
The policy of dropping COVID mandates meant to improve the economy may actually be working to extend the economics costs of the virus, they said.
“While helping on the demand side, diminished public health restraints, particularly during surges in case counts, are cutting into the economy’s supply capabilities. Their absence is likely elevating the peak levels for COVID cases, and thereby increasing the costs of worker absenteeism, and perhaps, as we’ve seen in the UK, risking longer term labour market damage due to Long COVID,” they said.
The economists said lockdowns should be behind us, but a push for the use of masks, global vaccination and improvements of indoor air quality would help reduce the economic impact of COVID.
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Check out the latest from Sea Doo maker BRP Inc. This electric surfboard called the Sea-Doo Rise in one of three products that Bombardier Recreational Products announced recently in its first foray into electric vehicles. The EV push also means a return to the award-winning two-wheeled motorcycles that BRP produced in the ’70s and ’80s. The Can-Am Origin and Can-Am Pulse motorcycles, along with the Sea-Doo Rise, will all be electric and will be available to purchase in mid-2024, said BRP. Photo by BRP
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Cryptocurrencies have been having a rough go of it lately, with Bitcoin shedding 47% of its value so far this year. The crypto bear market has become entrenched after a spate of company bankruptcies and the failure of major decentralized finance project Terra in May — and despite small rallies fails to meaningfully recover ground. Fans, however, might take heart from the map below that shows how common cryptocurrencies have become. According to Hellosafe, a comparison site for financial products, 99 out of 195 countries in the world now allow the use of cryptocurrencies, or 50.8% of them. Cryptos are legal in all the European Union countries and in 18 countries or 51.4% of the Americas continent. Only two countries in the world, however, have legalized Bitcoin as legal tender: El Salvador on Sept. 7, 2021 and the Central African Republic on April 27, 2022.
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