Confidence among German investors dropped in October, following the revelation of the Volkswagen emissions scandal as well as weakness in emerging markets.
Dow Jones reports that ZEW think tank’s indicator of economic expectations fell to 1.9 in October from 12.1 in September.
"The emissions scandal at Volkswagen and sluggish growth in emerging markets are dampening the economic outlook for Germany," said ZEW President Clemens Fuest in a statement.
"However, the performance of the domestic economy is still good and the euro area economy continues to recover. This makes it rather unlikely that the German economy will slide into recession."
Ratings agency Standard & Poor's reacted to the scandal by downgrading Volkswagen AG's credit rating on Monday. The company’s rating went from A to A-minus.
"As part of the surveillance process, we will continue to consider, among other things, the potential impact of VW's actions on its business prospects and competitive position, as well as its cash-flow generation and leverage metrics," Standard & Poor's said in a statement.
Meanwhile, the British transport secretary Patrick McLoughlin told the Commons transport select committee Volkswagen had “behaved in an appalling way”.
“These devices were made illegal in 1998 and it is unbelievable to think a company the size and reputation of VW have been doing something like this. They are going to suffer very substantial damage as a result and they deserve to,” he said.
Volkswagen will recall and refit up to 11 million cars worldwide including nearly 100,000 in Australia, following revelations they contain software used to cheat diesel emissions tests.