Germany Prepares For ‘Worst’ As Investor Outlook ‘Collapses’

“Economic expectations collapse,” read the headline atop the July vintage of Germany’s ZEW survey.

It’s hardly surprising that “the experts,” as ZEW calls investors, are feeling a bit anxious about the world’s fourth largest economy. After all, Germany is staring down the prospect of a severe recession tied to the prospective cessation of Russian gas flows following scheduled maintenance to the Nord Stream.

Economy Minister Robert Habeck is worried the Kremlin will find an excuse not to resume shipments once the work is complete. In that scenario, some fear a cascading series of defaults, figurative and literal — an acute energy crunch would morph into an outright crisis virtually overnight.

Consumers are already whistling past the graveyard. Uniper, which is in the process of lining up a government bailout, last week warned that German households and industries should expect an “enormous increase” once locked-in prices roll off and the impact of rising wholesale costs hits customers.

“It’s up to everyone of us to do something about it now,” CEO Klaus-Dieter Maubach said. “Something” means self-rationing. German lawmakers are reluctant to let companies raise prices to contracted consumers, but expensive spot-buying (to replace missing volumes) is a severe financial burden for providers.

ZEW President Achim Wambach cited “the current major concerns about energy supply in Germany” for a 26-point drop in the ZEW expectations index (figure below).

The series is noisy, but it’s worth noting that there have been just four monthly declines larger than July’s going back to the financial crisis: March of this year (after Russia invaded Ukraine), March of 2020 (the onset of the pandemic), July of 2016 (around Brexit) and one month during Europe’s debt crisis.

“Expectations for energy-intensive and export-oriented sectors of the economy have fallen particularly sharply,” Wambach went on to say. There were also concerns around the ECB’s plans to hike rates given the distinct possibility that tighter monetary policy will exacerbate what (forgive me) now appears as an inevitable recession.

Shares of Uniper meandered Tuesday after plunging 14% to start the week (figure below). The company apparently needs €9 billion, double its market cap, to shore up liquidity and replace Russian volumes with more expensive supplies.

Germany wants Finland’s help in order to lessen the taxpayer burden. Fortum Oyj is Uniper’s parent company. Finland isn’t enamored with the idea.

Nor, by the way, are some German lawmakers excited about the cost of a rescue and the prospect of the German government partially owning a company which operates in other countries, including, ironically, Russia. “We should take over the German part, but then make sure that the rest of the company with the controversial parts of the business is sold,” Green Anton Hofreiter, chairman of the Bundestag’s Europe Committee, told Spiegel last week. There’s also some debate about Uniper’s nuclear power operations.

Last week, Canada agreed to return a natural-gas turbine trapped in sanctions limbo to Germany, amid concerns Moscow might cite the missing part in explaining any decision to halt flows following pipeline maintenance. “We have eliminated this reason,” the Economy Ministry said.

But the Kremlin can always find another reason. And, as Russia demonstrated in late February, robbing Putin of pretext won’t prevent him from taking aggressive action, nor will plain old robbing him. (Incorrigible, that fellow.)

Habeck, speaking to reporters in Prague this week, said Germany “hopes for the best.” “But we prepare for the worst,” he added, quickly.