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River Rhine Only "Marginal" Issue for German Industry - Barclays 

"There are many factors currently driving the German economy, some of which, such as gas supplies, are likely to have a much greater effect," - Barclays.

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Germany is facing multiple serious challenges but the falling water levels along the Rhine riverway are not among them and even for the industrial engine of Europe's largest economy, they're only a marginal issue, according Barclays.

Water levels on the Rhine have fallen to only a quarter of their typical August levels, reducing the loads that can be carried by the ships that ferry materials between continental ports and Southwest German manufacturing facilities, some of which are of global importance.

Fears are that the river will become impassable, leading industrial operations to be halted with disruptive implications for manufacturers elsewhere too. 

"We quantify the effect of this on German industrial production and GDP using empirical analysis applied to actual past data on the level of the Rhine and the German Federal Institute for Hydrology's forecasts of the water level in the coming weeks," says Mark Cus Babic, an economist at Barclays. 

"We estimate this will reduce German industrial output growth; however, in the big picture we see the low Rhine as only a marginal headwind," he added.


Source: Barclays Research. 


This would not be the first time the river has become impassable and the previous instance in 2018 did lead to a small fall in GDP for the quarter but this time around things are likely to be different.

"It is not a game-changer and we note that a cut-off from Russian gas represents a much greater risk. In addition, this drag could be reversed as soon as Q4 as the Rhine level recovers as it did in 2018," Babic said while telling clients that the effect on GDP is likely to be little more than 0.2%.

Barclays said on Friday that reduced traffic along the riverway would be likely to reduce growth in German industrial production and by as much as around 0.4% for July and 0.8% in August but that a bounceback soon after would mean there is likely to be little lasting impact on the overall level of production. 

That's so long as the water level returns to more normal levels by late September in line with the German Federal Institute for Hydrology expectations.

"In addition, there is a degree of substitution to road and rail," Babic says.


Source: Barclays Research. 


"We are not changing our growth forecasts based on the low level of the Rhine, both because of the alleviating factors discussed above and because of the uncertainty associated with weather forecasts," Babic also said on Friday. 

Low water levels have limited implications partly because the industrial sector and German economy were already in the process of running aground themselves as a result of falling gas supplies from Russian pipelines and little, if any meaningful supply side response from governments elsewhere. 

These have raised costs for industry, squeezing margins along the way, and could themselves lead production levels to be curtailed later in the year.

This would be especially likely if a cold winter conspires with limited reserves of gas in storage and forces countries to resort to rationing of supplies in line with a plan agreed between European Union members in late July. 

"There are many factors currently driving the German economy, some of which, such as gas supplies, are likely to have a much greater effect," Babic said.