Russia Ukraine War - fuelling ! recession in GErmany !!

What is recession – will it affect Third world countries or advanced economies badly ? – is it internal economy or international factors that influence it !!  Will Iran Iraq war increase the price of brinjals in our local market and . .. will Russia Vs Ukraine fuel a crisis in a farther land !!

Both the stocks and the rupee rallied sharply on Thursday amid expectations that the US Federal Reserve could slow down the pace of its interest rate hikes. While the benchmark Sensex soared over 1041 points to cross the 56000 mark, the rupee gained 14 paise against the dollar to close at 79.76. The Sensex closed at 56857.79 points.  On Wednesday, the US central bank raised interest rates by 75 basis points, its fourth increase this calendar year. Though this was priced in by the markets, dovish commentary from Fed chair cheered investors.  In its continuing bid to cool down raging inflation in the United States — at 9.1% in June, the inflation rate is at a four-decade high — the Federal Reserve or Fed (US’ central bank) decided to raise the Federal Funds Rate target by another 75 basis points on Wednesday. Since March, the Fed has steadily pushed up the targeted FFR from zero to almost 2.5% now.

Economics is Profesors’ cup of tea ! – commoners may not understand it a wee bit.  One of the traditional definitions of a recession is "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."  In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster (e.g. a pandemic).

 

Before reading further, do read this story  about a man who once upon a time was selling hotdogs by the roadside:

He was illiterate, so he never read newspapers. He was hard of hearing, so he never listened to the radio. His eyes were weak, so he never watched television. But enthusiastically, he sold lots of hotdogs. He was smart enough to offer some attractive schemes to increase his sales. His sales and profit went up. He ordered more and  more raw material and buns and the sales curve shot up. He recruited few more supporting staff to serve more customers. He started offering home deliveries. Eventually he got himself a bigger and better stove.  As his business was growing, the son, who had recently graduated from College,  joined his father.

Then some strange events occurred.  The son asked, "Dad, aren't you aware of the great recession that is coming our way?" The father replied, "No, but tell me about it." The son said, "The international situation is terrible. The domestic situation is even worse.  We should be prepared for the coming bad times." The man thought that since his son had been to college, read the papers, listened to the radio and watched TV. He ought to know and his advice should not be taken lightly.  So the next day onwards, the father cut down the his raw material order and buns, took down the colourful signboard, removed all the special schemes he was offering to the customers and was no longer as enthusiastic.  He reduced his staff strength by giving layoffs. Very soon, fewer and fewer people bothered to stop at his hotdog stand. And his sales started coming down rapidly, same is the profit. The father said to his son, "Son, you were right". "We are in the middle of a recession and crisis. I am glad you warned me ahead of time."

Moral of The Story: It's all in your MIND! And we actually FUEL this recession much more than we think …

Europe's summer heatwave has only just finished, but already panic is growing in Germany over what horrors may lay in store for its citizens this winter. Vladimir Putin is choking the country's gas supplies - officially because of 'essential repair work' to pipelines, though few doubt he is exacting revenge for Berlin's defiance over Ukraine. Flows through Nord Stream 1, Germany's main gas pipe, are now at 20 per cent of normal levels. There are fears it could soon close for good.  That has sparked warnings of energy rationing for both households and businesses which, under worse-case scenarios, could force entire industries to shut down. Domestic energy bills could triple, pushing already-high inflation up by another 2 per cent. £240billion could be wiped off the economy, with aftershocks felt into 2024.

'Germany is on the cusp of a recession,' is how top economist Clemens Fuest put it.  Others worry the whole Eurozone could soon go into reverse. In order to avert a catastrophe, EU leaders agreed to cut gas use by 15 per cent but Germany - which imports the most Russian gas of any member state by far - faces double that. Economy minister Robert Habeck says he is taking shorter showers, while regional leaders are dimming street lights and closing swimming pools. The fiasco, MailOnline reports - is a legacy of Angela Merkel, who ignored 15 years of warnings from her own top energy expert Claudia Kemfert that over-reliance on Russian energy would make the country vulnerable. As Viktorija Starych-Samuolienė, co-founder of think-tank Council on Geostrategy, told MailOnline: 'Germany is in for a rough winter due to its heavy reliance on Russian gas.

Germany is, by a long way, the largest importer of Russian gas in the EU - buying some 52billion cubic metres of gas in 2020 according to figures from the bloc. The next-largest is Italy, on 28billion. Despite importing so much gas, it makes up a smaller portion of energy used in Germany than other European countries  - but runs critical manufacturing industries, and is also used to heat care homes and hospitals.  Germany is not alone in relying on Russian natural gas to run its economy, with some 40 per cent of EU member state's total gas consumption coming from its eastern neighbour.

But years of deliberate policy-making has made Germany uniquely vulnerable to Russian threats to cut gas flows. First, there is the sheer volume of gas that Berlin imports - almost 52.5billion cubic metres in 2020, according to EU figures, which is around double the next-closest nation, Italy, on 28billion. Second, Germany produces almost none of its own gas: Imports account for 95 per cent of yearly usage, powering key manufacturing industries as well as heating hospitals, care homes and houses. Third, is the delivery method: Gas comes exclusively to Germany via pipeline, which unlike other European nations does not have any ports capable of receiving liquified natural gas. Of those piping gas into Germany, Russia is by far the largest - accounting for 55 per cent of imports before the war - followed by Norway, Algeria and Qatar. Last: Nord Stream 1 is by far the most important route for getting Russian gas into Germany, capable of transporting almost all of its daily needs - though small amounts did also arrive via the Yamal pipe from Belarus and Poland and the Soyuz pipe that goes via Ukraine.

It means that, by shutting off a single pipeline, Russia could have cut off more than half of Germany's gas imports and left Berlin with very few ways to switch supplies at short notice. The situation has improved somewhat since the war broke out. Berlin has managed to cut Russian imports to around a third of its foreign supplies, and two liquified gas ports are under construction at Wilhelmshaven and Brunsbüttel, facing the North Sea. Chancellor Olaf Scholz, caught completely off-guard by the war in Ukraine, has set a target for German energy companies to fill gas tanks to 90 per cent - a task made harder by the fact that storage facilities, many owned by Russian firms, were running critically low just as Putin ordered his invasion. Firms are on course to miss that target, the country's regulator said on Monday, which IMF modelling suggests could mean the country running critically low on supplies all the way into the winter of 2026/27. That could force entire industries to shut down, economy minister Robert Habeck warned recently, as unions warned that many companies will not survive the tumult. Under federal law, German households are currently protected from rationing but ministers and executives have begun to warn that may have to change.  The country lacks the infrastructure to physically throttle supplies to homes, so the most-likely way gas would be rationed is to sharply increase prices. 

The crisis is likely to get so acute that Deutsche Bank predicts large numbers of Germans will resort to using wood burners to heat their homes this winter, instead of boilers. Moscow has denied the dwindling gas supplies have anything to do with the war, saying instead that turbines which pump the gas need to be repaired and are to blame. But experts point out that whenever turbines have needed routine maintenance in the past, Russia has boosted supplies through its other lines to cope. That has not happened this time. As the days grow darker and the weather grows colder, tensions are likely to rise further - to the delight of Moscow and the fear of Kyiv.

With regards – S. Sampathkumar
29^th July 2022. 

Pics credit : Dailymail UK