Rising energy costs squeeze German firms as war persists

German businesses grapple with soaring energy costs amid Middle East conflict

Energy costs for German businesses have stayed high as the Middle East conflict continues into its second month. The ongoing war has kept oil prices elevated, adding to pressures from the earlier loss of Russian gas supplies in 2022. Companies now face rising expenses, with gas storage levels at just 21.63%—lower than last year—raising concerns over supply risks. The latest Ifo price indicator hit 25.3 points in March, its highest level since March 2023. This follows a sharp rise from 20.3 points in February, signalling growing price pressures across sectors. Klaus Wohlrabe, head of the Ifo surveys, noted that inflationary pressures are picking up again.

Industry saw the steepest increase in price expectations, with the indicator leaping from 13 to 20 points. Business services, including wholesale, also plan more frequent price hikes, pushing their indicator from 24.7 to 27 points. Consumer-related services raised their expectations even more sharply, from 25.1 to 31.6 points. The construction sector followed a similar trend, with price expectations doubling from 10 to 20.2 points. These rises are tied to surging costs for crude oil, gas, and electricity—all driven by the war in the Middle East. Current gas prices sit at 11.06 cents per kilowatt-hour, with additional fees and CO2 taxes set to push them as high as 47 cents by 2045 in worst-case scenarios. Wohlrabe warned that high energy costs will likely fuel further inflation in the coming months, adding strain to an already pressured economy.

German businesses now face sustained cost increases, with energy prices remaining elevated and storage levels low. The Ifo indicator's climb reflects broader expectations of rising prices across multiple sectors. Analysts anticipate these pressures will keep inflation high in the near future, driven by ongoing geopolitical tensions and energy market instability.