Germany’s troubled industry in driver’s seat

FRANKFURT • Germany’s lingering automaker scandal  is taking its toll.

In many ways, Europe’s largest economy is looking pretty solid with record-low unemployment and booming exports telling the story of seemingly effortless expansion for most of the past three years. Yet a survey published yesterday showing a bigger than expected drop in investor confidence specifically cited car manufacturers’ woes — rigging of emissions software  and allegations of cartel-building — as a major factor.

The industry’s crisis may go well beyond besmirching the reputations of stalwarts such as Volkswagen AG (VW) and Daimler AG’s Mercedes-Benz and attracting the ire of Chancellor Angela Merkel. While Germany is famed for the small and medium-sized enterprises dotting its heartland, its economy still relies greatly on the fate of a few large firms, according to Goldman Sachs Group Inc economist Pierre Vernet.

Vernet’s calculations show that individual movements in activity by Germany’s top 35 firms typically account for roughly 30% of variations in  the country’s gross domestic product (GDP). Moreover, a large chunk of those are in the automobile sector, which steers about 15% of German GDP fluctuations, compared to about 10% of total gross value added.

“The disproportionate impact of these firms on output growth likely reflects important spillover effects from German carmakers to a wide range of suppliers, as well as to more domestically oriented activities in locations where these industries are based,” Vernet wrote in a research note last week. “Pinning down Germany’s macroeconomic outlook will require keeping a close eye on the auto sector and the impact of recent large idiosyncratic shocks to it.”

What matters for Germany’s economy also matters for the 19-nation euro-area, with any slowdown hindering the European Central Bank’s efforts to revive the currency bloc’s consumer-price growth. Policymakers will meet in Frankfurt on Sept 7 to decide whether they can start signalling the tapering of their bond-buying programme in the first step toward ending monetary stimulus.

The gauge of German investor confidence published by the ZEW Center for European Economic Research can’t have eased worries that the regional recovery isn’t yet quite strong enough. The reading dropped for a third month in August, by a greater magnitude than economists had forecast, and is now the weakest since October. While the impact of a strengthening euro is part of the
concern, automakers can share the blame, said ZEW president Achim Wambach.

“The significant decrease of the ZEW economic sentiment indicator reflects the high degree of nervousness over  the future path of growth in Germany. Both weaker than expected German exports as well as the widening scandal  in the German automobile sector in particular have helped contribute to this situation.”

The emissions-cheating scandal at VW was uncovered nearly two years ago, but the fallout continues to plague the industry. Extra regulatory scrutiny has been imposed  and some five million diesel cars were recently recalled in Germany.

In addition, a lawsuit filed  in San Francisco last month alleges that BMW AG, Daimler, VW and its Audi and Porsche brands shared competitive information about vehicle technologies with one another from 1996 through at least 2015 in violation of antitrust laws. In conjunction with Germany’s regulator, the European Union’s antitrust overseer has said it’s studying possible collusion among auto manufacturers.

Sales have slowed. Germany’s 3.1% car-market growth in the first-half of this year lagged behind a Europewide gain of 4.6%, and VW has said that it sees intensifying headwinds ahead.

Vernet isn’t the only one watching the auto sector as a potential culprit for future  economic weakness. The Bundesbank on Monday inserted  a line in its monthly report about the impact of potentially phasing out diesel cars through quotas or by introducing bans in certain cities.

“The discussion over driving prohibitions for older diesel vehicles in some German cities has so far barely left marks on sentiment among companies in the motor vehicle industry. Further developments remain to be seen.”While that line doesn’t ring alarm bells just yet, it does show that the German central bank, at least, is keeping its eyes on the road ahead. —Bloomberg