Another Ominous Sign: Germany Logs First Trade Deficit Since 1991

Call it yet another sign of the times. And, perhaps, another ominous sign for the world’s fourth largest economy.

Germany logged a trade deficit in May, according to data released on Monday. Imports rose nearly 3% from April, while exports slipped.

Adjusted for calendar and seasonal effects, Germany exported €125.8 billion in goods in May and imported goods worth €126.7 billion, leaving a deficit of almost €1 billion (figure below).

Germany’s surplus has dwindled since February, when Russia invaded Ukraine, pushing up commodity prices.

This is significant. Germany hasn’t notched a monthly trade deficit since 1991. On a 12-month basis, the value of imports rose nearly 28% compared to an 11.7% rise in the value of shipments abroad.

In all likelihood, Germany will keep running a deficit, at least for a few more months. Europe’s largest economy is on the precipice of what many fear could be a very deep recession triggered by the cessation of Russian gas flows. The Kremlin curbed deliveries by more than half last month, and Economy Minister Robert Habeck continues to warn that flows may dry up entirely following scheduled maintenance to the Nord Stream pipeline this month.

Yasmin Fahimi, the head of the German Federation of Trade Unions, delivered a series of dire soundbites over the weekend and was set to meet with Olaf Scholz on Monday.

Read more: German Economic Collapse May Be Biggest Tail Risk

The German economy is facing a perfect storm. Global economic growth is poised to slow materially, which could weigh on exports going forward. Meanwhile, the cost of energy is likely to remain very elevated (and very erratic) in Europe, which is at pains to secure sufficient gas before winter.

Brussels is effectively asking Vladimir Putin to supply enough gas to make the transition away from Russian supply painless, even as Europe endeavors to inflict maximum pain on the Russian economy. Putin will countenance that arrangement only to the extent it’s necessary. Thanks to high energy prices, Russia can live with reduced shipments. Plainly, Moscow is becoming more comfortable with the prospect of sharp cuts to its largest market.

That comes with the usual caveats: It’s not generally advisable to embark on wars of conquest that entail burning bridges with the biggest buyer of your country’s most import exports. That’ll likely prove ruinous over the long-term, especially in the context of efforts to accelerate the transition away from fossil fuels. Russia’s economy is backsliding (or “transitioning” if you prefer euphemisms) to what amounts to a less developed state. Import substitution is difficult and for some goods and services, impossible.

But Europe is in a very tough spot too, and Germany is on the front lines of the economic war with Moscow. If export momentum wanes further as the global economy downshifts and energy prices continue to fluctuate wildly, trade could be a drag on German growth. That, at a time when consumers are squeezed by the highest inflation in modern history, with more to come if the government decides to allow utilities to pass along higher costs associated with procuring missing volumes on the spot market.

At a conference in Frankfurt Monday, Lutz Diederichs, chief of BNP Paribas Germany, said a cessation of Russian gas flows would likely compel German banks to set aside extra capital for a prospective surge in corporate defaults.