Peugeot is reporting strong demand for the 2008 in France and increasing its production

Peugeot is reporting strong demand for the 2008 in France and increasing its production

There are more hopeful signs lately of gathering monentum for recovery in the European car market. Car sales in Western Europe were up by 10% in March. 

Data released by LMC Automotive shows that the West European car market was up 7.4% for the first quarter of the year. The Seasonally Adjusted Annualised Rate (SAAR) of sales for March was 11.8m units a year (in February it was estimated at 11.9m units).

Even the traumatised car markets of southern Europe have turned up. There were signs in March of a further thawing in southern Europe's frozen car markets with both the Italian and Spanish markets turning in positive growth.

Data from Spanish trade association ANFAC shows that sales in Spain last month were up by 10% on last year, helped by a government backed scrappage incentive scheme. The Spanish economy has now begun expanding though the government's PIVE scheme continues to be implemented due to the current fragility of the market. In Italy, ANFIA data showed that new car registrations in March were up 5% to 139,337 units, taking first quarter car sales up to 376,519 units, some 5.8% ahead of last year.

The positive market data will be welcome, though both countries' car markets are recovering from a severely depleted base. Italy's car market has fallen from 2.2m units in a 'normal' year to just 1.3m in 2013, while Spain's car market has fallen well under a million units.

Some of the most beleaguered OEMs are feeling some respite. The French car market was up 8.9% year-on-year in March. The French car market remains weak, but it is in growth territory. Car sales reached 179,871 units in March, taking first quarter sales to the quarter to 446,615 units, 2.9% ahead of last year. New models from PSA and Renault are now helping to push the market up. Renault Group was up 20.6% to 47,526 car sales in March and PSA was up 15.1% to 52,345 units. Low-cost Dacia models such as the Duster are also continuing to sell well.

Renault is benefiting from strong sales of its Captur and Peugeot is being boosted by its new 2008 crossover. Peugeot is adding what it calls a 'half night shift' at its Mulhouse factory in eastern France to meet demand for the 2008 crossover. The extra shift will increase daily 2008 production to 860 units a day.  

The broader economic picture for the region (putting the uncertain crisis in Ukraine to one side) has also looked brighter lately. Europe's economy has returned to growth again (even if it is only around 1% a year) and long-term interest rates are much lower; ten-year government bond yields in the bailout countries of the eurozone have moved down, considerably. The worst of the sovereign debt crisis appears to have passed and investors now seem more worried about emerging markets than the prospect of a eurozone break-up. The European Central Bank (ECB) has done the right things to calm things down in Europe, putting a ceiling on bond yields and making it clear that it had the muscle to use in markets and would use it. The sense of volatility has faded.

However, significant worries remain over the condition of Europe's economy and the legacy of the economic problems of recent years. High unemployment will act as a constraint to economic growth and keep wages and prices down. And low inflation is turning into more of a worry now. If prices start falling, that's when it gets really serious (the problem is that you would not rationally spend money on a good that will be cheaper next week, so you hold off and keep holding off while prices are falling). The danger is that Europe could be heading into a prolonged period of Japanese-style price deflation and sluggish economic growth. The IMF's boss, Christine Lagarde, warned of these dangers last week and called on the ECB to pursue more monetary easing. "There is the emerging risk of what I call 'low-flation', particularly in the euro area," she said.

In its latest projections, the IMF said that the euro area is "turning the corner from recession to recovery". Economic growth is projected to strengthen to a hardly stellar 1% in 2014 and 1.4% in 2015, it said, but the recovery will be "uneven". The pickup will generally be more modest in economies under stress, despite some upward revisions, including Spain. High debt, both public and private, and financial fragmentation will hold back domestic demand. Unemployment will remain stubbornly high, with austerity budgets firmly in place for years to come. The best that can be hoped for is a degree of economic stability and a sustainable, if slow, recovery.

LMC analyst Jonathon Poskitt is cautious on the outlook for the European car market, but acknowledges a corner has been turned. "This market recovery is coming off a very low base and the market is still at a historically very low level." However, he notes that Europe's economy is now growing again amnd monthly results are consistently up on year-ago levels. "We saw the European car market stabilise in the second half of last year and now there is indeed growth and that's welcome, of course," he said.

"The return to growth in the eurozone is obviously welcome," he maintains. "And some national car markets have been running at such low levels that replacement demand can come on stream fairly quickly, in concert with scrappage incentives in the case of Spain, to show markets up on year-ago levels.

"However, significant economic problems remain. Unemployment rates, for example, are running at very high levels in some countries and there are concerns over the underlying strength of consumer demand. This will act as a constraint to the region's economic performance and to the recovery of demand in the region's car market."

LMC forecasts that the West European car market in 2014 will rise by around 3.5% to almost 12m units, still way under the 14m-plus markets of pre-recessionary times.

So, things are still some way from being 'back to normal' in Europe and risks remain. The banking crisis of 2008/9 and its economic fallout will be with us for a while yet. There are structural issues holding back demand, not just cyclical ones. For Europe's economy a move to deflation and falling prices is a serious risk that would make things worse. The ECB in Frankfurt is very mindful of that and how fragile this economic recovery is by historical standards.

We are, however, in the car business at least, inching away from the worst of it. Car sales in Western Europe grew by 10% in March. That's very good news, of course. Just don't get too carried away.

Hear LMC analyst Jonathon Poskitt discuss prospects for Europe's car market with just-auto editor Dave Leggett in an exclusive webinar on Friday, April 11 (more details and free registration).

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