Maxime Alimi, Senior Economist at AXA Investment Managers (AXA IM), discusses the impact of the Volkswagen (VW) scandal on the German economy and concludes that the impact is uncertain in both, its magnitude and timing, due to the possible international spill-over and other second-round effects.
The economic consequences are highly uncertain, and anything but negligible. The recent VW scandal sent immediate shockwaves into global financial markets, but the implications on the German economy may take longer to be felt.
Assessing this impact runs into two major difficulties. First, the scope of the shock: it seems clear that VW will bear financial and reputation costs that will affect its prospects for a long time. However, is it just a shock to VW? Or is it a shock to the diesel technology in general? Will global consumers walk away from the entire German car industry? Or worse, is the whole ‘made in Germany’ brand under threat? Only time will tell what lasting changes this scandal will have initiated.
The second difficulty is measuring how this impact will be transmitted from the car industry to the wider economy. The automotive sector is central to the entire industrial sector and uses most other industries as suppliers, making amplification effects particularly pronounced.
To begin understanding how to deal with these issues, we start from input-output tables that capture the relationships between sectors. Remarkably, in this way, we find a multiplier of 1.6 for the German car industry, meaning that any shock in that sector is amplified by 60%. Such an approach confirms how misleading it may be to just consider that the car industry accounts for less than 3% of the economy.