The recent string of shocks (China, equity market corrections, VW) has brought sizeable downside risks to confidence and the economic outlook. In the recent data, the German August industrial data are probably the most concerning.
While holiday effects may explain some of the steep slowdown, two features stand out according to Societe Generale,
1) Foreign orders for motor vehicles collapsed in August, before VW. A smaller decline in euro area orders suggests that holiday effects were not the whole story.
2) Exports to the US and the UK have started to soften, while they have masked the slowdown in China so far, a weakening US/UK outlook would hurt the euroarea materially, as exports to the UK/US are four times bigger than those to China.
Still, with a strong outlook for domestic consumption, the impact of the headwinds remains unclear. The VW scandal may mainly be a challenge for the diesel industry in Europe, with positive short term effects on service output from recalling cars, while the inflow of migrants will also boost fiscal spending and consumption.
As regards China, policy makers appear to have been reassured over the recent weeks that, although conditions are weak, the economy is not about to head over the cliff. Last week, the IMF left its forecast for growth in China unchanged in 2016 from its June assessment of 6.3%. Crucially, fiscal and reserve buffers should be sufficient to protect short term growth prospects.
