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Germany: Fiscal Risks of Tight Gas Supplies

The economic outlook for Germany has deteriorated in recent months due to high energy price inflation and rising gas security risks. The sharp increase in global energy prices has weakened the purchasing power of domestic households and weighed on business costs and business and consumer sentiment. Moreover, high uncertainty about the future scale of Russian gas supplies has raised gas security risks particularly for the upcoming heating season. This commentary takes a closer look at recent gas market developments and lays out the downside risks for Germany's public finances which emanate from a potential gas shortage. While not envisaged in our base view, a potential gas shortage in the coming winter might lead to disruptions in industrial production and, as a result, to higher public support needs for companies particularly in energy-intensive manufacturing industries. Furthermore, the commentary describes why the recent increase in global gas prices is likely to necessitate additional government support measures either for households or domestic utilities. Household gas heating bills are set to increase markedly over the next months as the strong increase in wholesale import prices for gas has so far not been fully passed through to domestic consumer gas prices.

Key Highlights

• Prolonged cutoff in Russian gas supplies would raise the risk of gas shortages in the coming winter.
• Energy-intensive manufacturing would bear the brunt of potential gas supply cuts.
• The future strong increase in household heating bills is likely to necessitate additional government support measures.
• Germany commands over ample fiscal space for absorbing a temporary increase in budgetary pressures.

“A potential gas shortage in the coming winter would raise the risks of costly government bail-outs for companies in energy-intensive industries as gas needs from industrial consumers are subordinated to those of households,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar. “These substantial downside risks for public finances, however, are mitigated by Germany’s ample fiscal space for absorbing a temporary increase in budgetary pressures.“