Despite the global scandal surrounding Volkswagen, German business optimism remained unfazed in October, according to the latest survey by the Ifo Institute for Economic Research.
The Ifo Business Climate Index for German industry and trade fell to 108.2 points in October, from 108.5 points in September, data released on Monday showed. It was the first drop since June this year.
Nevertheless, optimism on future business developments continued to grow, Ifo's data showed, signaling that the emissions scandal surrounding Germany's automaker Volkswagen has not had as much of an effect on sentiment as previously feared.
The business expectations index rose from 103.3 in September to 103.8 in October (the highest level since June last year) although the assessment of current conditions fell from 114.0 to 112.6 over the same time frame.
Ifo President Hans Werner-Sinn said the German economy was "proving remarkably resilient in view of this autumn's multiple challenges."
"Indeed, the Volkswagen scandal has had no impact on the German automotive industry. The climate index for the automotive sector even continued to rise this month. Assessments of the current business situation and business expectations both improved," Werner-Sinn said.
Last month, VW admitted to installing devices in its diesel engines that enabled it to cheat on emissions tests in the U.S. The scandal cost the chief executive of the firm his job and more heads are expected to roll once investigations into the rigging have been concluded. Volkswagen is at the heart of German industry, employing 270,000 people in Germany.
Carsten Brzeski, chief economist at ING, said German businesses showed "an interesting reaction to the recent series of uncertainties and turmoil."
"Of course, one should not interpret too much in a single confidence indicator but today's Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off," he said in a research note Monday.
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"(It is also shrugging) off the risk from a possible Chinese and emerging markets slowdown. Despite these external uncertainties and regular concerns about the real strength of the German economy, German business remain highly optimistic," he added.
There are two possible explanations for this trend, Brzeski explained, "either German businesses are naive optimists or ice-cold realists, sticking to the facts. In our view, there are many arguments in favor of the latter."
Sounding a warning note, however, Brzeski warned that "not all was well in the land of cars" with a lack of new structural reforms, an unfinished energy reform and too few domestic investments.