German business morale shrugs off VW scandal

New data also shows economic growth led by private, government consumption

Photograph: Ralph Orlowski/Bloomberg News

Photograph: Ralph Orlowski/Bloomberg News


German business morale rose in November to the highest level since summer 2014, shrugging off an economic slowdown in China, the Volkswagen emissions scandal and the attacks in Paris.

The unexpectedly strong business climate reading by Ifo came after Statistics Office data on Tuesday showed that rising private consumption and higher state spending on refugees more than compensated for weakness in foreign trade in the third quarter.

“The German economy remains unaffected by growing uncertainty worldwide. Not even the Paris attacks had a negative impact on survey data,” the Munich-based Ifo economic institute said in a statement.

Data from the Federal Statistics Office earlier showed strong private consumption and higher state spending on refugees helped the economy to grow at a modest, albeit slower, pace of 0.3 per cent in the third quarter.

Ifo’s business climate index, based on a monthly survey of some 7,000 firms, jumped to 109.0 from 108.2 in October. It was the strongest reading since June 2014 and beat the Reuters consensus forecast for a reading of 108.2.

A separate index measuring corporate expectations over a half-year horizon jumped to 104.7, suggesting many firms believe they can cope with the economic headwinds.

“Neither the VW emissions scandal, nor the refugee crisis, nor the attacks in Paris are scratching the mood of German companies,” DekaBank economist Andreas Scheuerle said, adding that German business morale was like a “teflon-coated pan”.

Ifo economist Klaus Wohlrabe told Reuters that German consumption continued to perform well while export expectations remained positive, adding that a sub-index for the automotive sector continued to rise despite the VW emissions scandal.

In a separate release, the Federal Statistics Office in Wiesbaden said domestic demand increased 0.7 per cent in the three months through September.

Imports jumped 1.1 per cent, while exports rose just 0.2 per cent and capital investment shrank by 0.3 per cent. The economy expanded 0.3 per cent, matching a November 13th estimate.

Record-low unemployment and interest rates are supporting domestic spending in Europe’s largest economy, countering the effect of a China-led cooling in emerging markets that’s curbing German sales overseas. More stimulus may be ahead as the European Central Bank considers whether to ease euro-area monetary policy further.

“At least in the third quarter, the German economy has finally become what many international critics had been demanding for a long while: a domestically-driven economy,” Carsten Brzeski, chief economist at ING-DiBa in Frankfurt, said in a note. “Consumers saved the economy and offset the industrial slump of the summer months.”

Public Spending

Government expenditure expanded 1.3 per cent last quarter, the fastest rate since the start of 2009, and private spending increased 0.6 per cent. The figure for exports was the weakest in almost three years. Domestic demand added 0.7 percentage point to growth, while net trade stripped out 0.4 percentage point. Inventories added 0.2 percentage point. Economic activity in Germany picked up this month, with a gauge of services at the highest level since September 2014 and a measure of manufacturing also advancing, a survey by London- based Markit Economics showed on Monday.

The ZEW index of investor confidence rose in November for the first time in eight months. The chief headwinds are emanating from an emerging-market slowdown, sparked by China as it tries to reduce its dependence on investment and exports. The nation was Germany’s third- largest trading partner last year. Ifo Index Still, Switzerland’s Kuehne and Nagel International expects volume on Asia-European ocean routes, with China accounting for about two-thirds of the cargo, will rise as much as 4 per cent in 2016 after declining as much as 6 per cent this year, Otto Schacht, the company’s sea-freight chief, said in a Bloomberg interview last week.

“We do not expect Germany’s economic growth to swing out in one or the other direction from the current trend of steady but unspectacular,” said Johannes Gareis, an economist at Natixis SA in Frankfurt. “Thanks to a stabilisation of global growth, the lower euro and improving financing conditions on the back of a further easing of the ECB’s monetary-policy stance in December, we believe that Germany’s hard data will improve rather than deteriorate.”