A partial shutoff of Russian gas is already piling pressure on Germany’s economy. In July, we estimated that a complete shutoff of the remaining (40 per cent of) Russian gas supplies would reduce gross domestic product by almost 3 per cent next year and raise inflation significantly. The effects could be even worse if the winter is particularly cold, write YUSHU CHEN and GALEN SHER.
Like other European Union member states, Germany has agreed to cut gas consumption by 15 per cent between August 2022 and March 2023, to avoid gas shortages and spiraling prices. The country is already on track to achieve this target. As the chart below shows, gas consumption was already down by about 17 per cent in May, 8 per cent in June and 15 percent in July compared with averages of the past five years.
Gas consumption chart
What caused this drop in gas consumption? Temperature is unlikely to be the main explanation. The number of “heating degree days”—a typical measure to forecast gas demand based on the number of cold days and the coldness of those days—was similar in June and July to the same months in previous years.
Instead, the soaring cost of energy seems to have caused consumers to save gas. Large businesses are making especially severe cuts. Comparing June with the previous five years, gas prices for businesses were up by 267 per cent, which is likely to account for their reductions in gas demand. Carmakers, for instance, say they are already cutting gas consumption by switching to renewable energy.
While gas saving helps build resilience ahead of winter, it comes with short-term costs: manufacturing and services activity contracted in July for the first time in two years, according to surveys of purchasing managers. The IMF revised down projections for Germany’s economic growth to 1.2 per cent in 2022 and 0.8 per cent in 2023 due in large part to higher energy costs.
What could help further
So far, households have made only a small contribution to gas savings because most have contracts with suppliers that fix the gas price for about a year—though this might change soon. As part of a package of measures to enhance energy security after Russia’s invasion of Ukraine, the Federal Cabinet on August 4 approved a temporary levy that will encourage gas savings by raising prices paid by households (and businesses) from October. The government has indicated an intention to accompany the levy with additional relief to households, which should ideally take the form of targeted income support.
Higher savings of gas by households would relieve firms from some of the pressure to save gas. In turn, this burden-sharing could lower the risk of a recession. To save even more gas, as the IMF explains in its recent staff report and blog, the government could compensate users for reducing gas consumption and establish programmes to exchange gas heaters for electric heat pumps.
*Chen and Sher are on the staff of the IMF.