Blog: Dave LeggettScrapping incentives?

Dave Leggett | 25 November 2008

I guess there may well be some people in Detroit who will have to shorten their Thanksgiving break later this week. There's a need for a report on the way forward before any 'bridging loans' bailout assistance is forthcoming. Washington lawmakers have made it pretty clear that they will not throw good money after bad. That report from the Detroit 3 (or should that be 2.5?) needs to be pretty compelling.

On this side of the pond, similar themes are being played out as companies note that volume and cash flow projections for next year look worse than they did a few weeks ago. And European subsidiaries of US automakers have the additional worry of what may happen if the parent's umbilical cord is abruptly severed.
In Britain, Honda announced last week that it will shut its UK plant for two months. No redundancies are planned, yet. That's a firm that has been doing relatively well but is suddenly finding a hole in its revenues due to lower demand in Europe. At least, in that case, there is some relief from a competitive exchange rate.
But I think the focus in the coming weeks will return to the bigger economic picture.

The international banking system may have avoided complete collapse, but there are clearly persistent and serious problems with credit availability in the real economy.
And there's the question of how to stimulate the sluggish global economy to minimise the impact of recession next year. Interest rates as a tool alone, it seems, won't do the job. Some governments are concluding that we also need tax cuts and/or increased public sector spending to break the logjam and protect jobs.

Let's also hope free trade doesn't suffer from any protectionist sentiment - that could ultimately do even more damage to the global economy, and especially this industry, if it spreads in the economic hard times.

One thing's for sure. This recession is shaping up to be very different to those that have characterised the post-war period (usually triggered by inflationary pressures and the subsequent need for higher interest rates). We're in new territory after the easy credit boom that ended abruptly last year. We won't be going back to what was 'normal'; there are big structural adjustments to be made. And in that sense, the uncertainties - for consumers and businesses alike - are greater than we have seen before.

That may just present policymakers with an opportunity as well as a challenge.

And, in the auto industry, there are proven levers that can perhaps be applied to stimulate the market - such as scrapping incentives for old cars (they have worked successfully at times in France, Spain and Italy). Such incentives can also be allied to encouraging people to buy smaller and more fuel-efficient cars to give a pleasing green hue to policy. The stock of cars in use gets newer and cleaner. That's maybe a support measure that looks a little bit smarter than just relying on soft loans - essential though they may be, also.

But, even in the scrapping incentives scenario, potential customers need to be able to access credit and also feel that the economic world, as we know it, has a future.

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