Deutsche Bank CEO warns recession is inevitable, says Germany must cut reliance on China

Deutsche Bank CEO Christian Sewing warned Wednesday that a recession in Germany is inevitable, and urged the country’s leaders to accelerate its decoupling from China.

In a speech at the Handelsblatt Banking Summit in Frankfurt, Sewing noted that Russia’s war in Ukraine had “destroyed a number of certainties” on which the global economic system was predicated over the past few decades.

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He cited a halting of globalization due to major geopolitical tensions, which is unlikely to abate any time soon and has disrupted global value and supply chains, along with a bottleneck in the labor market and a scarcity of gas and electricity leading to soaring costs, as key reasons why euro zone inflation is at record highs.

“As a result, we will no longer be able to avert a recession in Germany. Yet we believe that our economy is resilient enough to cope well with this recession — provided the central banks act quickly and decisively now,” Sewing said, according to a translated transcript.

He added that for now, many people still have pandemic savings to fall back on in order to meet rising energy costs, while most companies remain “sufficiently financed.”

“But the longer inflation remains high, the greater the strain and the higher the potential for social conflict,” he said.

The German economy stagnated in the second quarter, while producer price inflation hit a record high in July. The German finance ministry cited reduced gas supplies from Russia, rising costs of energy and other goods, and persistent supply chain disruptions in part due to China’s “zero-Covid” policy.

Russia’s war in Ukraine has forced the European Union to accelerate efforts to reduce its reliance on Russian energy and raw material imports, and Sewing said the invasion had shone a spotlight on the dangers of becoming too dependent on individual countries and regions.

“When it comes to dependencies, we also have to face the awkward question of how to deal with China. Its increasing isolation and growing tensions, especially between China and the United States, pose a considerable risk for Germany,” Sewing said, adding that China had become a “cornerstone” of the German economy.

He highlighted that China accounts for around 8% of German exports and 12% of imports, while more than one-tenth of the sales of companies listed on the country’s DAX stock index go to China, adding that the pandemic made clear the extent to which German supply chains rely on Russia.

“Reducing this dependency will require a change no less fundamental than decoupling from Russian energy,” he said.