BAKU, Azerbaijan, January 12. The overall effect of higher gas prices on the German economy is not substantial when seen from the production side, Dr. Jan-Christopher Scherer, research associate of the Macroeconomics Department at German Institute for Economic Research (DIW Berlin) told Trend.
“Higher gas prices impose higher costs for firms in their production, however, the effect mainly depends on whether it is used as an input directly or as a source of energy. If gas constitutes an important production input, for example in the chemical industry, we see that production is somewhat affected, as given the line of production the gas is harder to substitute. In these industries and in addition also in industries with a particularly high demand for energy, like manufacturing of basic metals, glass and ceramic, production declined stronger in 2022 than industrial production overall and is still around 11 percent below the overall value,” he said.
Scherer pointed out that besides these industries, firms largely managed to substitute gas for other sources of energy and were therefore much less affected, because the higher prices for gas as well as the anticipation that prices will remain elevated for the foreseeable future triggered substantial efforts to reduce energy consumption and invest in clean alternatives.
“The share of energy-intensive firms of value added in the industry is around 17 percent and industry in turn only has a share of about 30 percent of total value added. Therefore, the overall effect on the German economy is not substantial when seen from the production side. However, there is also an effect on private consumers. Faced with higher energy costs, many households reduced their consumption, which reduced German GDP. This is the main reason the DIW Berlin expects German GDP to have declined by 0.3 percent in 2023,” the expert added.
He noted that energy and particularly gas prices rose for nearly all European countries in 2022.
“Although the effect was pronounced for Germany, it has always had relatively high energy prices compared to its neighbors. Firms which decide to produce in Germany do so because of the overall attractiveness for doing business, for which energy prices are only one determinant among many,” Scherer concluded.
