The curious case of Shrinkistan and Squeezeland

The start of a new year is normally slow news time. There’s precious little of consequence happening anywhere as December ends and January begins. Of course, this is how things used to be.

This year, we’ve had plenty happening in the Middle East and North Africa, for which the media world is probably truly grateful. We’ve also had stuff happening in Europe. And by stuff, I mean energy recaps for 2023. It’s recap season and it’s great.

Did you know, for instance, that in Germany, 55% of the electricity fed into the grid last year came from renewable resources? No, you didn’t. Now you do. Wind farms were the top performers, accounting for 31.1% of total electricity fed into the grid. A win for wind energy, for sure.

There was more good news from Germany, too. Last year, Germany cut its natural gas imports by a stunning 32.6% from a year earlier. How did it accomplish this feat of energy greatness, you might wonder. Let’s hear it from Reuters: “it saved on energy and exported less after Russia cut off westbound shipments the previous year.”

Not only this but emissions in Europe’s still biggest economy dropped by as much as 20% last year, to the lowest since the 1950s.

What a great time to be Germany. But it has had competition. The Carbon Brief informed us this month that electricity production from hydrocarbons in the UK had fallen to the lowest since 1957. Since a peak in 2008, generation from coal and gas had declined by an impressive 66%, as wind and solar rose six times. Hooray for the UK.

Alas, there is an awkward part of this energy success story and it’s quite a big part.

As Germany boosted its wind and solar output, and lost most of its Russia gas imports, its electricity imports surged by 63% while exports declined by 24.7%. While emissions dropped, half of the drop was attributed to lower industrial activity, per a local climate think-tank, no less. And lower emissions were not the only consequences of that shrinking activity.

Economic growth in the EU’s powerhouse ran in place for the first two quarters of last year only to dip in the third quarter. The drop was minor, at 0.1% but significant: some economists now expect Germany to book negative growth this quarter as well, which would classify it as a country in recession.

Industrial activity in Germany booked monthly declines for five months in a row to October — the latest data — even though the October shrinkage was dubbed “unexpected” for some reason. Lack of demand was listed as one reason, and interest rates as another.

More than 8,000 companies went bankrupt in Germany in just the first half of last year, and not just industrial companies, either. Speaking of industrial companies, the German government worried so much about the future of its economic backbone that in October it agreed a support package to help industrial producers with their energy costs.

The package should be in place for five years and cost 12 billion euro in the first year alone. It will reduce industrial consumers’ electricity tax from more than 1.5 eurocents per kWh to 0.05 eurocents.

Meanwhile in the UK, “"Manufacturers are seeing a very sharp slowdown in activity as the potent cocktail of rising interest rates, cost of living and slowing overseas markets bites hard," per manufacturing sector organisation Make UK.

Because of this potent cocktail, the trade body has revised down its outlook for 2023 and now expects a decline in output of 0.5% for last year and growth of the same modest size for this year. The latest data, for December, shows a deepening decline in output. As in Germany, this was attributed to weaker demand at home and abroad.

UK’s economy also shrank in the third quarter — and the decline was once again called unexpected — fuelling expectations of a reversal of monetary policy, i.e. rate cuts.

So, let’s recap, since ‘tis the season. Germany and the UK are making history in wind, solar, and emissions. At the same time, their industrial activity is shrinking and, quite unsurprisingly, contrary to media reports, their GDP is shrinking as well.

The culprits behind the shrinkage are higher interest rates and weak demand for industrial production. And said shrinkage might, just might, have a tiny little bit to do with energy costs as suggested by the German support package for industrial producers.

Since I mentioned energy, here’s a fascinating chart of electricity prices for households in a couple of dozen of select countries.

In the UK, electricity costs are the second-highest on the list, after only Ireland, at $0.44 per kWh. In Germany, the average is $0.40, which makes it the country with the fifth-highest electricity prices in Statista’s selection.

Moving way down the list we find China, at $0.08 — on par with India — and Russia, at $0.07. The IMF expects China’s economy to have grown by 5.4% in 2023. Also the IMF sees Russia’s GDP growing by 2.2% in 2023.

“But correlation does now equal causation,” many would happily — or angrily — point out. It could be a coincidence that Germany and the UK pay some of the most expensive electricity in the world and their economies are struggling while they build megawatt after megawatt of wind and solar capacity.

Yeah, it probably could, if we were talking about divorce rates and margarine consumption or per capita cheese consumption and the number of people dead from getting tangled in their own bedsheets.

When we’re talking about economic growth and energy costs there is a pretty obvious causal link, because energy underlies all economic activity. In industrial production, the link is especially clear: cheap energy stimulates more production.

It also stimulates more demand because people don’t need to spend half their salary on the electricity bill, which seriously compromises their capacity to afford pretty much anything else, besides food, and even that is becoming a problem.

It must surely be a coincidence that Germany and the UK pay some of the most expensive electricity in the world and also have some of the greatest wind and solar capacity in that same world — and some of the highest electricity output from that capacity, let’s not forget.

Or it could be a non-coincidence but a case of cause and effect. Because China has the greatest wind and solar capacity in the world yet its electricity prices are more than four times lower than those in Germany or the UK. Only that capacity doesn’t contribute more than half of the electricity on the grid. It only contributes about 30% even though wind and solar capacity is greater than coal and gas. Must be another coincidence.