VW scandal sours German investor sentiment

Investor sentiment in Germany slumped in October as the Volkswagen pollution cheating scandal and slowing emerging markets growth dampen the outlook for Europe's top economy, a leading survey said Tuesday.
The widely watched investor confidence index calculated by the ZEW economic institute sank 10.2 points from 12.1 last month to just 1.9 points, its lowest level since October 2014, the think-tank said in a statement.

"The exhaust gas scandal of Volkswagen and the weak growth of emerging markets has dampened economic outlook for Germany," said ZEW president Clements Fuest.

"However, the performance of the domestic economy is still good and the euro area economy continues to recover. This makes it rather unlikely that the German economy will slide into recession," Fuest said.

For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.

The sub-index measuring financial market players' view of the current economic situation in Germany also declined, falling by 12.3 points to 55.2 points in October, its lowest level since March, ZEW said.

The latest drop in the headline index was steeper than analysts had expected, and came on the day Volkswagen said it would slash its annual investment budget by one billion euros ($1.13 billion) for its main VW brand.

It "confirms that concerns over the global environment and the scandal at Volkswagen are taking a toll on investor confidence, which might affect economic activity in the months ahead," said Jennifer McKeown of Capital Economics.

"The fact that the index is now only just above zero means that only a small majority of investors see economic conditions improving in the next six months."

- Has economy peaked? -

The data were a "warning that Germany's economic cycle may already have passed its peak. In all, the survey supports our view that German growth is likely to slow in the coming months," McKeown said.
The head of the German machine tool manufacturers' federation, Reinhold Festge, agreed.

"It's clear we're currently in a phase of weakening," he told a congress in Berlin.

McKeown at Capital Economics said she was pencilling in overall economic growth of 1.5 percent this year, to be followed by a slowdown to 1.2 percent next year -- considerably weaker than the government's expected new forecasts, which are set to published on Thursday.

Natixis economist Johannes Gareis also said the renewed decline in the ZEW index -- the seventh consecutive monthly drop -- "adds further downside risks to Germany's economic growth outlook".

"Despite the growing concerns over Germany's economy, however, we keep our growth forecast unchanged for now at 1.5 percent this year and next," Gareis said.

Germany's domestic fundamentals remained healthy, as reflected by a robust labour market and solid retail sales, the expert argued.

Moreover, many eurozone countries had been seeing an uptick in their economy, and solid growth in the US and other important export markets should help counter the weakness in trade with China and the wider emerging markets.

"In light of this, other sentiment readings and hard data for September should provide a clearer picture on Germany‘s true economic condition," Gareis concluded.