German Business Sentiment Exceeds Expectations Despite VW Scandal

German business confidence dropped less than expected in October, indicating an ongoing expansion in manufacturing despite the recently mixed macro data.

Kristian Rouz — German business confidence in October dropped less than anticipated as the impact of the VW emissions scandal to the nation’s automotive industry turned out to be insignificant.

Meanwhile, the slowdown in emerging markets, potentially bearing a negative tendency in the German exports, has thus far failed to provide a major blow to manufactured goods’ output and shipments. Still, the anxiety in the nation’s economy lingers amidst mixed data across sectors, deflationary pressures and a murky global outlook.

The Ifo Institute’s business climate index, Germany’s most respected measure of business confidence, dropped in October for the first time in four months as an aftereffect of the international scandal caused by Volkswagen’s violation of environmental regulations in the US.

The decline in business confidence was, however, much less than previously expected, and, coupled with mixed, yet largely upbeat, macro data it is possibly a signal the lackluster global trends have had so far little to no impact on the Eurozone’s biggest economy.

The Ifo business climate index dropped to 108.2 in October from 108.5 a month ago. The previous consensus estimate for this month was 107.8. A separate measure of corporate confidence for six months from now increased to 103.8, its seven-month highest.

That is an indication of bright financial planning by most businesses, even though the mediocrity of global growth and weakness on the demand-side might have suggested otherwise.

The Munich-based Ifo measures business confidence on a monthly basis by scrutinizing reports from roughly 7,000 enterprises from all over Germany.

Both measures are an indication of the German economy’s greater sustainability than previously believed. Amidst the combination of negative factors, the ongoing rise of the export-oriented manufacturing, including the automotive and high-tech sectors, has contributed to a better financial performance of Germany’s corporate sector.

Meanwhile, the broader picture is mixed. Certain global headwinds have already taken their toll on the German industries, with new orders, production volumes and shipping having all dropped in August. Earlier this month, the ZEW survey among economists decreased to its 12-month lowest, as the VW scandal was believed to have provided a massive blow to the nation’s economy.

Another Ifo measure, the index of current conditions, sank to 112.6, its 7-month lowest, reflecting the current uncertainty of the emerging markets situation, as well as energy sector and concerns of domestic inflation.

Although the sentiments are upbeat, a slight deterioration in real economy data might stir some concern. A slowdown in mainland China might also negatively affect German investments; however, the ongoing influx of capital would easily make up for investment losses related to emerging markets.

For now, though, the German investor confidence measure dropped to its twelve-month lowest. Still, the recent Purchasing Managers’ Index (PMI) readings are upbeat for Germany and the entire Eurozone, and, in line with today’s Ifo figures, suggest that moderate expansion in German manufacturing would persist, while growth in services would accelerate more buoyantly.