Russia’s invasion of Ukraine and its manifold consequences have slowed down the regional economy. Supply problems as well as material bottlenecks are increasing and energy prices continue to rise at a high level. The hoped-for boost with the end of the Corona restrictions has therefore failed to materialise.
In spring 2022, the economy in the Ulm region of the Chamber of Industry and Commerce will be affected by opposing forces. On the one hand, the extensive lifting of the Corona restrictions will finally allow the affected industries to resume normal business activities: retailers, hoteliers and restaurateurs will be able to open their doors without restrictions, personal service providers will be able to utilise their capacities more fully and event organisers will be able to organise larger events again after a long break. They are hoping for brisk demand due to the private purchasing power pent up during the pandemic and the long, enforced absence of these offerings.
“On the other hand, Russia’s invasion of Ukraine and the subsequent sanctions, which have been tightened several times, are acting as a powerful kick on the economic brake. Supply chains are being interrupted, supply bottlenecks for materials and primary products are increasing, and driven by energy and raw material prices that continue to rise at a high level, inflation is increasing more and more. The sharply increasing uncertainty in the economy and society due to the latent danger of an escalation of the Ukraine war as well as an impairment of the security of energy supply are further depressing the mood. Added to this are the effects of the zero-covid policy in China,” says IHK President Dr Jan Stefan Roell. “All in all, the restrictive influences outweigh the negative ones. The strong recovery of the regional economy that was still expected at the beginning of the year is receding into the distance.”
The IHK economic climate index, a measure of the situation and expectations of companies, has dropped significantly by 14 points and at 114 points is now again noticeably below the 10-year average.
Current assessments of the situation remain stable. As at the beginning of the year, almost every second company reports that its business is going well. Four out of ten companies are in a satisfactory situation and every ninth company is doing badly.
However, in view of the increased risks, not much remains of the slight confidence that was still present at the beginning of the year. More than three-quarters of all companies fear that their business will be impaired by further increases in energy prices, an increase of 24 percentage points compared to the beginning of the year. Two-thirds of the companies are concerned about rising raw material costs (+14 percentage points). More companies than before also cite the development of demand as a risk. The lack of skilled workers threatens to slow down business development in six out of ten companies.
As a result, the regional economy’s outlook for the next twelve months is much gloomier than at the beginning of the year. The share of optimists has declined by only five percentage points to 24 per cent. The number of pessimists, on the other hand, has more than tripled to 30 percent. Thus, on balance, scepticism dominates. In particular, the foreign-oriented companies expect a significantly weaker development of their exports. The industry expects somewhat lower but still strong impulses from North America alone. Demand from Europe is losing momentum. Business in Asia only remains stable.
For the time being, the reduced expectations on average for the economy as a whole have no impact on investment and employment plans. The somewhat weakened investment dynamic in industry contrasts with slightly rising budgets for domestic investments by service providers. Investments in energy efficiency and environmental protection have gained noticeably in importance as a motive in view of the exploding energy costs. Most companies want to keep their staffing levels constant. 23 percent want to create additional jobs, 14 percent see themselves forced to reduce staff.
“Overall, the uncertainty in the economy is great. Policymakers must therefore proceed with caution and foresight. A gas embargo, for example, would not only affect energy-intensive industry, but the economy as a whole. After all, the current crisis has made it clear that almost all companies are closely interwoven via production and logistics chains,” says Roell.
Industry gets a damper
For manufacturing companies, the war in Ukraine means further increases in energy and raw material prices, additional supply bottlenecks and dwindling sales opportunities. So far, however, local industry has been able to cope with the slowdown in demand from abroad thanks to well-filled order books. Moreover, domestic demand remains brisk for the time being. Capacity utilisation remains at a high level (87 percent). Fifty-eight per cent of the industrial companies assess their current situation as good. However, the number of companies with poorly performing businesses has risen slightly.
Successfully navigating the rougher waters is also likely to become an increasingly difficult challenge in the coming months. The regional industry is particularly concerned about the sharp rise in raw material and energy costs. A gas supply stop or embargo would be even more expensive for large parts of the industry, as it could lead to shutdowns next winter at the latest. Restoring or building new supply chains will also take longer than hoped. The increased uncertainty worldwide is also dampening export prospects. Only a quarter of industrial companies expect exports to increase, almost half as many as at the beginning of the year. The share of companies that fear a decline in exports climbed from four to 19 percent. Strong demand impulses are only coming from North America. Exports to the Eurozone will clearly lose momentum. Sales in the rest of the world will stagnate at best. As a result, the pronounced confidence at the beginning of the year has faded. Although 30 per cent of industrial companies are still confident about the future, 31 per cent expect their business to deteriorate. This is also reflected in a reduced investment dynamic. The demand for personnel, however, remains on the rise.
Retail trade still under pressure
The hopes of many retailers that they would finally be able to take off with the lifting of most Corona protection measures in spring are not being fulfilled for the time being. High inflation and the Ukraine war are dampening the mood to buy: the share of regional retailers who attest to their customers’ cautious buying behaviour has risen from 55 percent at the beginning of the year to 73 percent. Sales have hardly increased in the first months of the year compared to the previous year, in stark contrast to costs. This is weighing on the earnings of many retailers and there is no improvement in sight any time soon. Although private households have additional savings due to the pandemic, they are likely to hold back a large part of it for the upcoming sharply increased utility bills. As a result, no retailers are looking ahead with confidence. Slightly more than half expect business to remain the same, the rest fear a deterioration.
Wholesalers are also feeling the effects of the Ukraine war, and foreign business has lost all momentum. However, domestic sales continue to develop positively thanks to still strong demand from domestic industry. Despite a noticeable decline, satisfaction in the wholesale sector thus remains at a high level. The outlook for the future is much more cautious due to increasing risks: More wholesalers are currently worried about rising energy and raw material costs than at the beginning of the year. Nevertheless, wholesalers want to continue to increase their capital expenditure, especially to drive forward the digitalisation of their business processes as well as sales and other innovations. Staffing needs also remain on the rise.
Service providers: no uniform mood
The service sector is also experiencing opposing cyclical currents. The transport industry is suffering particularly from higher fuel prices. And even the business-related service providers assess their current situation at a high level somewhat more critically than at the beginning of the year. On the other hand, the contact-intensive service providers – event and trade fair organisers, wellness, hotels, restaurants, tourism, culture as well as leisure – can finally use their capacities more again with the lifting of most infection control measures. Overall, this results in a slightly improved current situation. The share of service providers who are doing badly has fallen by five percentage points to 13 percent. 45 percent are in a satisfactory situation (+4 percentage points), 42 percent are doing well (+1 percentage point). The fact that the current situation is not rated even better is probably mainly due to the sharp rise in energy and raw material costs (electricity, gas, food, etc.).
The further development of prices is also causing two-thirds of the service companies some headaches for the coming months. Only the shortage of skilled workers is mentioned even more frequently as a business risk. In particular, companies affected by previous lockdowns fear that the majority of the skilled workers they had to let go due to lack of business during the pandemic will not return. The development of demand is also again mentioned much more frequently as a risk. This is reflected in subdued business expectations. Six out of ten service providers expect business to remain more or less the same, 21 percent expect improvements, 20 percent are pessimistic. Investment plans have improved slightly at a low level, short-term personnel planning continues to be characterised by caution.