Wednesday, September 23, 2015

Germany - Chased by cars?

Tomorrow’s Ifo index should get less attention than normal. The latest events in the automotive industry overshadow ordinary confidence indicators and could eventually leave their marks on the German economy. Normally, the release of the Ifo index is always a special day for markets and observers of both the German and the Eurozone economy. It remains the first and most prominent leading indicator. Tomorrow’s release, no matter what the outcome will be, is already outdated before the numbers have actually been released. As so often in recent months with German confidence indicators, the Ifo comes between at least two drastic events and therefore is unable to capture the impact of any of the events. In normal circumstances, tomorrow’s Ifo index should give a better understanding of the possible impact of the late-summer market turmoil and the Chinese slowing on the German economy. The ongoing refugee crisis and now Volkswagen shocker, however, pose new risks to the German economy, which tomorrow’s Ifo will not yet capture. As regards to the refugee crisis, it is clearly too early to assess the possible impact. Besides the evident direct costs of building refugee shelters and housing and offering financial support, all other effects on, for example, the labour market, are still too unclear to be put in numbers. Obviously, the simple equation that an ageing economy with a shrinking labour force needs more immigration is appealing. However, only time will tell as to whether the German society can show enough and, even more important, sustainable flexibility to support long-term integration. As regards to Volkswagen, a short-term reaction of the German economy is more likely, even if at the current juncture it still is unclear what the impact from recent allegations will really be. Needless to say, owning 12 brands in seven European countries and having a global market share of around 13% of all passenger cars, there will be an impact. Volkswagen is one of Germany’s most important global champions. It is an important growth driver for the German economy. In Germany, Volkswagen employs more than 270,000 people and according to media reports is the third largest employer in the EU. Returning to Germany and adding a proxy of the possible suppliers to the equation, Volkswagen accounts for roughly 1.5% of German employment and even more when it comes to the growth impact. At this point, it is unclear what the impact of the probe into VW’s diesel manipulations will be. Volkswagen set aside more than €6bn as risk provisions. Estimates of a possible fine from US regulators for Volkswagen currently range from €1bn to €16bn. Moreover, the company will clearly have costs in changing the cars, with latest reports referring to 11 million cars affected by the diesel manipulations. As a reminder, Volkswagen produces around 10 million new cars each year. The reputational damage is currently impossible to assess. While the German economy defied Greece, the euro crisis and the Chinese slowdown, it could now be facing the biggest downside risk in a long while. The irony of all of this is that the threat could now come from the inside, rather than from the outside.

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