Olaf Scholz cannot hide his disappointment. “We all had hoped that 2022 would be a boom year after the supposed end of the pandemic,” said the German Chancellor at the opening of the world’s largest industrial show, the Hannover Messe. “Instead, we are talking about problems in the supply chains, rising energy and commodity prices, lockdowns in China caused by the pandemic and the serious consequences of the war in Ukraine.”

That’s why there is actually no trace of Boom in Germany. On the contrary: The economic situation is becoming increasingly gloomy, as reported by Michael Hüther, Director of the German Economic Institute (IW). And that’s nothing that can be argued away. “The recession is in sight,” says the economist.

The Federation of German Industries (BDI) does not want to go that far. Nevertheless, the trade association expects only slight growth in exports and industrial production in the current year.

“Supply networks and supply chains are stretched to the breaking point,” says BDI President Siegfried Russwurm, explaining the current situation on the sidelines of the Hanover Fair. “In addition, we are still concerned about the corona virus and its consequences – acutely due to China’s failed zero-Covid policy, in perspective in the concern of a new virus variant in autumn.” And that makes the year extremely challenging and weakens economic growth considerably. “We find ourselves in a difficult, oppressive and uncertain environment.”

The BDI sees the increase in production in the manufacturing sector in the current year at just under two percent. “That’s definitely less than we imagined before the Russian invasion,” says Russwurm.

And even for this forecast there is still great uncertainty. The same also applies to exports, for which the BDI is currently predicting growth of 2.5 percent. That is 1.5 percentage points less than in January.

The order books of industrial companies are full to bursting. The machine builders, for example, have orders for 11.6 months in the books, reports the Association of German Machine and Plant Construction (VDMA). A buffer of around seven months is usual.

And the electrical industry is also reporting an order range of an average of 5.7 months, which is well above the normal level, which according to the Association of the Electrical and Digital Industry (ZVEI) is around six weeks.

“However, we cannot implement and process the orders promptly as usual,” explains ZVEI President Gunther Kegel, referring to bottlenecks and problems in the procurement of raw materials and preliminary products, especially semiconductors.

But controls are also a problem. The machine tool manufacturer Schütte from Cologne, for example, reports that it has now had a two-year waiting period for certain elements.

Current figures from the Ifo Institute show how tense the supply situation is. According to the May edition of the economic researchers’ monthly survey, 77.2 percent of companies in the manufacturing sector suffer from material shortages.

“The supply chains are under constant stress,” says Klaus Wohlrabe, head of surveys at the Ifo Institute. The closure of ports in China in particular has further worsened the situation for many companies. Because in the People’s Republic – by far Germany’s most important trading partner – entire cities such as the economic metropolis of Shanghai are repeatedly being locked down for weeks due to corona outbreaks.

As a result, goods cannot be produced or arrive late. Mechanical engineering is hit particularly hard, with 91.5 percent of companies complaining about missing parts and components. However, other key sectors such as the electrical and automotive industries are of similar magnitude.

The tense situation is already having consequences for mechanical engineering. “We have to reduce our forecast again,” says VDMA President Karl Haeusgen. At the turn of the year, the industry had still expected seven percent growth for 2022, but in March this figure was then reduced to four percent.

“But even that can no longer be maintained,” reports Haeusgen. “Especially since we are now seeing a clear reluctance among customers and declining orders.”

The VDMA is now predicting a production increase of one percent. The fact that sales are expected to increase by a nominal eight percent to 239 billion euros is due to corresponding price effects due to inflation and increased material and logistics costs.

Above all, the energy prices, which have risen sharply as a result of the war, are driving up the costs of the producers. And this burden is then passed on to the customers. In April, for example, German imports became more expensive than they had been for decades, according to the Federal Statistical Office.

According to the statisticians, import prices are 31.7 percent higher than in the same month of the previous year, which was last in September 1974 during the first oil crisis. The biggest driver is natural gas, which has cost a good 300 percent more than twelve months ago. But other raw materials have also become noticeably more expensive, as have supplier parts.

This combination of high prices and poor availability is now causing the industry to review and diversify its supply chains. “We are reorganizing our supply chains and will localize more – in China for China and in Europe for Europe,” says Siemens board member Cedrik Neike. “We will get away from sending things around the world five times to finish producing them.”

At the same time, politicians on the fringes of the Hanover Fair are emphasizing their willingness to promote the construction of chip factories in Germany and Europe in order to become more independent. The federal government is making around 17 billion euros available for this alone.

BDI boss Russwurm is also calling for further steps to better secure raw material purchases in the future. An analysis by the association shows that of the 30 raw materials and raw material groups that are classified as critical in the EU, ten are mainly supplied from China. 69 percent of the rare earths that companies need for electrification and wind power are mined in China. Up to 86 percent of the processing into usable raw materials takes place in China.

“Without raw materials, there would be no Industry 4.0, no energy transition, no e-mobility,” warns Russwurm. “Wherever possible, Germany and Europe should not be excluded as exploration and processing locations,” demands the industry representative. This could offer ecological and social advantages, because integrated value chains and high-quality jobs grow with the sustainable extraction and processing of raw materials.

“The BDI continues to focus on globalization and worldwide value chains – including China.” But it is sensible not to put all your eggs in one basket.

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