As eurozone economic growth plateaus, VW scandal a worry

AP News
Posted: Sep 23, 2015 6:38 AM

LONDON (AP) — Economic growth across the 19-country eurozone is showing signs of slowing, according to a survey conducted before any assessment of the impact on German industry of the emissions-rigging scandal engulfing carmaker Volkswagen.

Financial information company Markit said Wednesday its monthly purchasing managers' index — a broad gauge of business activity — fell to 53.9 points in September from 54.3 the previous month. Though anything above 50 indicates expansion, the decline points to slower growth.

Markit says its survey points to quarterly growth of 0.4 percent in the third quarter, unchanged from the previous three-month period.

"There remains a worrying failure of growth to accelerate to a pace sufficient to generate either higher inflation or strong job creation," said Chris Williamson, Markit's chief economist.

The projected quarterly growth rate is, according to Williamson, below what is generally regarded as the eurozone's long-term potential and puts the region on course to expand by just 1.6 percent this year.

A more detailed look at the survey shows that Germany is enjoying its best quarterly expansion for a year even though growth slowed slightly in September.

Some economists are beginning worrying about the impact on German growth from the Volkswagen crisis. The world's top-selling carmaker has admitted that 11 million of its diesel vehicles contain software that evades emissions controls, far more than the 482,000 cars identified last week by the U.S. Environmental Protection Agency as violating clean air laws.

While Volkswagen is struggling to contain the fallout, there are concerns that the scandal will hit sales as brand is damaged. Since VW is a major part of the German economy, there could be some implications for growth.

Carsten Brzeski, chief economist at ING Germany, said the ongoing refugee crisis and now the "Volkswagen shocker" pose new risks to the German economy, which have yet to be picked up by surveys.

Brzeski concedes that it is "unclear" what the impact of the VW crisis will be, but that there will likely be one given the size of VW. It is, he notes, "one of Germany's most important global champions" and an "important growth driver for the German economy."

Volkswagen AG has already set aside 6.5 billion euros ($7.2 billion) to cover costs related to the scandal and could face billions more in fines and penalties.

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"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," Brzeski said.

Michael Hewson, chief market analyst at CMC Markets, also warned that the scandal could weigh on German growth, not least because of the importance of the car industry to the German economy.

"It is going to take quite a lot of skilled panel work to repair the dents in the 'Made in Germany' brand, particularly given this scandal has exposed a deliberate attempt to deceive," he said.

"The implications for German GDP growth could well be significant in the coming months, if global trust is lost, not only for VW but also the rest of the European car industry, if evidence is uncovered that we aren't seeing an isolated case," he added.

In the second quarter, Germany grew by a quarterly rate of 0.4 percent.