How does the German economy react to scandals


The Dax 30 is at its lowest year value, Volkswagen AG has been fighting for its credibility for more than a month, after evidence came out that the Wolfsburg-based company has been cheating for years over the CO2 emissions of its diesel models; and Deutsche Bank AG just reported a loss of 6.2bn€ for the third quarter, cutting dividends and bonuses.


To add more distress to the picture exports fell by 5.2%, the biggest drop since 2009, following a fall in China’s growth, towards which Germany has an exposure equal to 4% of its GDP, by far the greatest in the whole euro-area.


So, is this the beginning of a recession? As Cyrus de la Rubia, chief economist at Hamburg-based HSH Nordbank AG, said “There’s no reason to panic.”


Both Volkswagen scandal and Deutsche bank losses are exceptions that do not reflect the true corporate environment in Germany. Even though they will have a serious toll over the economy, they are completely detached from the “mittelstand”, terms that refers to the small and middle-size enterprises which constitute the backbone of German’s economy.


Consumer spending is picking up, driven by a continued strong performance in the labor market with rising wages and increasing employment, leading to a forecasted year growth of 1.8% both in 2015 and 2016, according to the Minister of the Economy in Berlin.


Low commodity prices, partly due to the shrinking economy in China, and the weak euro, will lead to a second order effect, leading to a more beneficial effect on earnings and mitigating the slump in exports.


The recent influx of hundreds of thousands of refugees into the country is also going to boost the size of the workforce. Notably, this alone could push up annual German GDP growth by as much as 0.6 per cent by 2020.


In conclusion the general outlook seems positive, with some of the decline that we are experiencing due to a correction of previously strong performances, which is not going to considerably affect the whole economy.


 

WRITTEN BY GIULIO ORSENIGO FOR BESA

PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT


#Volkswagen #Germany

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