Will the VW scandal put the brakes on German growth?

The news last week that Volkswagen had cheated emissions tests prompted speculation that “Made in Germany” branding had been dealt a blow that could seriously jeopardize the economy’s prospects. Given the importance of the car industry to German output and employment, fears about the effects of this on the German economy are understandable.

For now, we are inclined to believe that the scandal will pass without any major long-term economic effects. However, short-term damage to business and consumer confidence could offset the boost from recall-related activity. We still see German GDP rising by 1.5% this year and next. But downside risks are mounting.