Germany's manufacturing sector is confronting the risk of severe disruption as renewed drought conditions impede traffic on the nation's most crucial inland waterway, casting a shadow over recovery prospects for Europe's largest economy.
Fabian Spies, deputy managing director of Germany's main inland shipping trade association BDB, stated that water levels on the Rhine River have fallen to a point where vessels are forced to reduce their cargo loads, consequently driving up transportation costs. This presents a significant challenge for manufacturing firms, including ThyssenKrupp AG and BASF SE, which rely on barges to transport goods such as coal, crude oil, and chemicals.
ThyssenKrupp reported that its Duisburg plant has been impacted, as the steelmaker had to suspend its own tugboat service and switch to using external ships capable of navigating the current water levels. BASF has been compelled to increase the number of vessels in operation as it is forced to run its fleet with restricted capacity.
Analyst Martin Ademmer of Commerzbank noted in a report on Wednesday that the Rhine's water levels are lower than at comparable times during previous drought years. He warned, "If the low-water period is prolonged again, it could put pressure on industrial output, thereby exacerbating the challenges facing an already weak sector and creating a downside risk to the gradual recovery we have forecast following the energy price shock." He added that companies are likely better prepared now than during past similar situations, which could cushion the potential blow.
The German government has been attempting to foster a recovery from years of stagnation through domestic reforms and increased spending on infrastructure and defense. However, this effort to revitalize growth has been complicated by conflict in the Middle East, prompting Berlin to halve its 2024 growth forecast to 0.5% in April.
According to data from the Kiel Institute for the World Economy, a months-long period of low water on the Rhine in 2018 cost the German economy approximately 0.4% of its output. Another drought in 2022 caused disruptions shortly after Europe was grappling with the aftermath of Russia's invasion of Ukraine.
Deutsche Bank economist Marc Schattenberg pointed out that the problem is compounded this year by a lack of rail alternatives, as a key freight route on the right bank of the Rhine is closed for construction. Schattenberg noted in a report that, following positive second-quarter data, "against the current geopolitical backdrop, transport-related supply chain delays would be an unwelcome headwind for a manufacturing sector that is stabilizing." However, given the multitude of factors at play, it is "difficult to isolate and assess its precise impact on GDP" unless the disruptions become very severe.
A further concern is whether this situation will fuel inflation at a time when the European Central Bank is weighing further interest rate hikes beyond the one in June to curb price surges triggered by the war in Ukraine. ECB Executive Board member Isabel Schnabel this month listed the Rhine as one of the factors that could keep price increases elevated.
Daniel Hartmann, an analyst at Bantleon AG, estimates that the Rhine's water levels alone would not push German inflation up by more than 0.2 percentage points. However, he stated it could exacerbate the broader challenges posed by dry weather, including pushing up food prices.
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