GBP Monitor: Companies reduce investments and job openings in anticipation of energy embargo and further cost pressure

The data from May 2022 show that more and more businesses have been cutting new investments since the war in Ukraine broke out: In mid-February, almost 60 percent of German companies were still making new investments. This number has decreased to 40 percent as of late.

Especially the companies that depend on materials and resources from Russia, e.g., on natural gas for their production, are now taking precautionary measures: Companies that employ gas in their production processes or along their supply chain are 21 percentage points less willing to make new investments than those that use it only for heating. “Many companies already expect bottlenecks in energy supply – and take this expectation into account when making decisions. Investments and job openings at these companies are plummeting, which means that many of these companies are paralyzed,” explains Professor Jannis Bischof, holder of the chair of Business Administration and Accounting at the University of Mannheim.

Many companies also plan to increase their prices and reduce dividends and bonuses. „In the face of the cost explosion that started back in 2021 and is fueled by rising costs for energy and intermediate goods, companies are looking for alternative solutions“, says Dr. Davud Rostam-Afschar, academic director of the GBP of the University of Mannheim. “At the moment, we are mainly observing significant increases in prices, but also adjustments of distributions as a means to alleviate cost pressures,” Rostam-Afschar elaborates.

The negative effect this crisis will have on the future is also illustrated by the fact that more and more companies are cutting their funding for research and development. Recently, 15 percent of interviewed businesses stated that they were planning to cut back on these investments compared to the previous year. Before the war broke out, only 5 percent of the companies said they wanted to reduce these investments.

Construction industry cuts back on hiring

In the construction industry, in particular, things have taken a turn for the worse: Construction companies stated that they intended to drastically decrease the hiring of new staff in order to save costs. Even during the coronavirus crisis, the construction sector was making profits. Now the increase in prices for raw materials and building materials is hitting the sector very hard. “Small construction companies have often accepted fixed-price contracts. As they are unable to forward the higher costs for purchasing material to their customers, they are often losing money when carrying out orders. This means that they have fewer financial resources for making investments and hiring new staff”, says Bischof. Due to the extreme rise in purchase prices, the companies are very cautious when it comes to accepting orders, says the project manager of the GBP.

The report also shows that the number of companies in favor of an embargo on energy from Russia is declining: Compared to the second week of the war, the share of companies in favor of an embargo has decreased from 52 to 38 percent.

The complete report on company trends in April 2022 can be found here: https://www.accounting-for-transparency.de/wp-content/uploads/2022/05/gbp_monitor_2022_05.pdf (in German)

Further information on the GBP monitoring report
The German Business Panel interviews more than 800 companies per month on the economic situation in Germany and collects data on 1) any expected changes in revenue, profit, and investments, 2) economic decisions, 3) the expected default probability in the sector and 4) the satisfaction with the economic policy. Furthermore, the GBP reports includes current questions each month.

Background information on the German Business Panel
The German Business Panel is the long-term survey panel of the trans-regional project “Accounting for Transparency“ (www.accounting-for-transparency.de).

The Collaborative Research Centre (CRC) “TRR 266 Accounting for Transparency“ started in July 2019 and is funded by the German Research Foundation (DFG) for four years. It is the first CRC with a focus on business administration. Approx. 80 researchers from the following eight universities participate in the CRC: Paderborn University (host university), Humboldt-Universität zu Berlin, University of Mannheim, Ludwig-Maximilians-Universität München, ESMT Berlin, Frankfurt School of Finance & Management, Goethe University Frankfurt am Main, WHU – Otto Beisheim School of Management and the Carl von Ossietzky University of Oldenburg. The researchers examine how accounting and taxation affect the transparency of companies and how regulation and firm transparency impact our economy and society. The CRC is funded with approx. 12 million euros.