German business confidence unfazed by VW scandal

German business confidence dipped only slightly in October, as Europe’s biggest economy continues to shrug off various challenges, including the Volkswagen scandal, a leading economic think-tank said Monday.

The Ifo institute’s closely-watched business climate index slipped to 108.2 points in October from 108.5 points in September, Ifo said in a statement, a much shallower drop than analysts had expected.

For its survey, Ifo quizzes businesses about their current business environment and the outlook for the next six months.

The sub-index measuring current business fell to 112.6 points, its lowest level since March, but the outlook sub-index rose to 103.8 points, the institute said.

“Companies were slightly less satisfied with their current business situation than in September,” said Ifo president Hans-Werner Sinn.

But “optimism with a view to future business developments nevertheless continued to grow,” he said.

“The German economy is proving remarkably resilient in view of this autumn’s multiple challenges,” he said, in reference to Europe’s refugee crisis and the slowdown in China.

Even the Volkswagen pollution-cheating scandal “has had no impact on the German automotive industry,” Sinn said.

VW is currently embroiled in its biggest-ever scandal after it was exposed with fitting its diesel engines with sophisticated software to skew the results of pollution emissions tests.

The revelations have rocked the auto sector around the world and cast a shadow over the German economy.

But according to Ifo’s survey, “the climate index for the automotive sector even continued to rise this month,” the think-tank said.

“Assessments of the current business situation and business expectations both improved. Firms plan to ramp up production. Exports, however, are not expected to provide further stimuli,” Ifo chief Sinn added.

– VW scandal a ‘one-off’ –

Analysts welcomed the better-than-expected reading of the Ifo barometer this month.

“Of course, one should not interpret too much in a single confidence indicator but today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and is also shrugging off the risk from a possible Chinese and emerging markets slowdown,” said Carsten Brzeski at ING DiBa.

“Despite these external uncertainties and regular concerns about the real strength of the German economy, German business remain highly optimistic,” he said.

“Continued growth in the service sector, strong domestic demand and an outside world that might be slowing but is definitely not falling off a cliff, should keep the German economy on the sunny side,” the expert continued.

“All in all, the Ifo index shows that the German economy is not totally immune against external slowdowns and internal scandals. However, there is no reason at all to fear an abrupt slowdown,” Brzeski said.

Capital Economics economist Jennifer McKeown was more cautious.

“The small fall in the Ifo index in October echoes the message from other indicators that growth is now slowing,” she said.

“Admittedly, the decline … was not as sharp as the consensus forecast. The index remains at a pretty high level. In all, while we do not see German growth screeching to a halt, it seems clear that a modest slowdown is under way at a time when the economy’s spare capacity has only just been used up,” she said.

BayernLB economist Stefan Kipar similarly felt that the economic fallout from the VW scandal appeared to be limited for now.

The dip in the headline Ifo index “can be interpreted as a breather” following three consecutive increases since June, the analyst said.

“We’re not going to see a turnaround to the downside just yet,” Kipar concluded.