On the turn? After a long run of growth, the global car market was down in Q3

On the turn? After a long run of growth, the global car market was down in Q3

There were signs of global vehicle market weakness in the third quarter and stock market volatility suggests investors have become more nervous as 2018 has progressed. Dave Leggett assesses the state of the global vehicle market.

Earlier this year there was quite a fuss over the ten-year anniversary of Lehman's fall. Things have changed quite a bit since then, but the fact that a decade has passed since the events that ushered in an economic recession - in the West anyway - more severe than any since the 1930s, certainly gave pause for thought. Some commentators have even suggested that we are overdue another 'big one'. That's a little bit simplistic. The workings of the global economic and financial system are complex, but we are fortunate enough to learn from historical events. The international banking system, for example, is widely viewed as more resilient than it was in 2008 when the expansion of consumer credit (principally the sub-prime party in the US) reached an unsustainable level. It's hard to see a bubble quite as big as that looming in 2018 (caution: the economists' track record for predicting major global recessions is pretty woeful - there's no reason to suggest that the next one will be any different).

But there are real concerns, of course. One emanates from the unbalanced nature of global economic growth. The US economy - buoyed by corporate tax cuts - is strong and that has caused the Fed to raise interest rates. But the picture around the world is different. China's economy is slowing - a development not helped by the burgeoning trade war with the US. In China, and many other places around the world, interest rates are staying low. The divergence on interest rates with the US is driving the dollar up, which in turn causes repayments of dollar debt by emerging market countries to become more problematic (see difficulties in Argentina, Pakistan and Turkey, for example). Right there, we have a source of financial instability. In Europe, some countries - notably Italy - are having trouble with public spending and borrowing levels; the consequences of that are much more serious when countries with divergent and different economies - Greece and Germany, say - share a currency. Another eurozone financial crisis based on past templates is not exactly inconceivable.

There's also the worry that if the global economy and/or financial system gets into trouble, cutting interest rates won't be an option for much of the world the way it was in 2008/9. Other policy responses would be needed and it's far from clear how the necessary international cooperative structures would fare if a crisis emerges.

On the upside, higher energy and commodity prices should benefit many emerging market nations. And the global economic situation is still, overall, very positive. The steady expansion under way since mid-2016 continues, with global growth for 2018–19 projected to remain close to its 2017 level, according to the IMF. There are risks, but then there always are risks.

Growth of global vehicle market in 2018 will be a close-run thing

As far as the global car market is concerned, our analysis of the Q3 numbers shows that the market declined by just under 2% at around 22.5m units. So far this year (first three quarters), however, the market is a little under 2% ahead of last year's pace. If the market comes in flat in Q4, the market for the year will turn out to be just over 1% ahead of 2017's tally. Not bad going. But a small drop and it could well come in under. The market momentum seems to be with a small net annual decline being the most likely outcome. One reason for confidently making that forecast is that both of the world's two largest vehicle markets are seeing demand turn down.

At this point in the fourth quarter we know that the Chinese market was down in October, by a hefty 12% year-on-year. The economic forecasts certainly point to even slower growth in China, not helped by the adverse impact on consumer and business confidence of the ongoing trade spat between the US and China. Although there are signs that the automotive sector in China will be helped by Beijing (look for a purchase tax cut soon if the market declines in November and December are sizeable), the immediate outlook is for continuing soft demand and tough trading conditions. One aspect of particular concern is the decline to house prices in cities across China. Real estate has been a major plus in driving up China's economy and encouraging purchases of goods, including cars - typified by the rise of the urban middles classes. China's new class of consumers has also become highly indebted and some observers worry that could be a source of financial instability when economic growth slows to under 6% pa and asset prices turn negative. If China's economy experiences turmoil, it could be extremely hard for Beijing to navigate a path that keeps all the economic balls in the air.

The world's number two market is also facing challenging conditions. The US vehicle market is entering a down phase, at least in terms of where we think underlying demand is headed given the replacement cycle. The market was 17.2m units in 2017 and was around 17.5m units in each of the previous two years. By historical standards those are pretty big markets three years in a row, ceiling reached. It's hard to see the US vehicle market growing again in 2019, particularly as the economic lift caused by the Trump administration's fiscal measures wears off.

The US market managed to record growth in October (just 0.4%), but analysts are warning of an outlook for softer demand as interest rates rise - along with monthly car lease payments. Interest rates on new vehicles averaged 6.2% in October, up 1.3 points from a year earlier and marking the highest rate since January 2009, according to Edmunds. "It's getting harder and harder for shoppers to afford a new car, and if the economy starts to slip, we're at a point now where we really could start to see some significant impacts in the auto market," said Jeremy Acevedo, Edmunds' manager of industry analysis.

In Europe, the market is also at something of a high water level. There are worries, too, over the potential impact on the European economy of Brexit as well as potential financial instability that could follow difficulties that the Italian economy is having in hitting public borrowing targets consistent with its membership of the euro currency. The introduction of the WLTP emissions testing standard created volatility in the months of August and September (the West European car market was down by 23% in September after a 27% boost in August). From 1st September, the new and stricter WLTP testing regime must be used for all new cars in the EU, and only a limited number of cars tested under the old NEDC system can be sold after this date. Therefore, in August there was a strong incentive for self-registration of vehicles and heavy discounting on the part of retailers, while savvy buyers may have made purchases before higher taxes were applied where these are linked to CO2 emissions. The fallout - essentially, a depressed car market - looks set to characterise the remaining months of 2018. That would leave the West European car market at around 14.4m units - still pretty high in historical terms and that follows two years of markets close to 14m units. The market will struggle to maintain that level in 2019, especially if there is any significant slowdown to the European economy or interest rates rise significantly (there are some indications that the European Central Bank wants to engineer them upwards, if at all possible, to create some room for reductions on a future rainy day when recession bites - the point made above).

Other emerging markets around the world show a mixed picture this year. Russia continues to advance, the Russian economy boosted by higher energy prices. From January to October this year, 1,457,857 cars and LCVs were sold in Russia, 14.1% ahead of the same period last year. The Russian government has already approved a VAT rise from 18% to 20% on 1 January 2019. Local analysts also say that expectations of higher VAT in 2019 are helping to lift demand via brought-forward sales. If that's the case, expect a correspondingly weaker Q1 as payback kicks in.

In India, higher oil prices and interest rates have combined with a disappointing monsoon - which hits agriculture and the whole economy - to rein back market optimism earlier in the year. Nevertheless, India's rate of GDP growth is still expected to increase to over 7% in 2018. According to India's automotive trade body, SIAM, the Indian car market expanded by around 6% during the April-October period of this year. A market of around 3.4m units is forecast for this fiscal year. Optimism could build on the outlook if vehicle sales avoid falling back significantly, despite current headwinds.

Elsewhere, a mixture of higher interest rates and political events are acting as a brake to emerging markets. Iran? The re-imposition of sanctions has caused its economy to go into sharp reverse and car sales are off at least a third on last year. Optimism for new investment involving European partners is drying up. Turkey has experienced a financial and economic crisis that has inevitably hit the auto sector. In Brazil, the optimism surrounding the newly elected populist president could be sorely tested as the economy is buffeted by the strong dollar and still-high public debt. This year though, Brazilian vehicle sales are up against last year and could finish the year around 15% ahead of 2017, with over 2.5m light vehicles sold. However, neighbouring Argentina remains in the grip of financial crisis, vehicle sales running around a third lower than a year ago (the Q3 South American total in our table boosted by stronger sales in Brazil this year).

On the plus side, ASEAN vehicle sales were up 10% in Q3. Thailand continues to be the main driver of growth for the region's vehicle market, with sales rising by 22% in the third quarter and by over 20% to 746,584 units year-to-date. The country's economy expanded strongly in the first half of the year, by 4.7%, and is forecast to grow by around 4.5% over the full year. The Thai vehicle market is expected to exceed 1m units this year.

Global light vehicle sales by region, Q3 2018

Q3-2018Q3-2017% ChangeYTD 2018YTD 2017% Change
Global22,554,57423,003,293-1.9570,355,76069,080,1911.85
Asia9,189,7169,339,930-1.6128,338,07627,810,8911.9
Indian sub-continent1,081,3861,084,187-0.263,215,3182,960,0508.62
Central Europe335,128293,48914.191,070,728962,82111.21
East Europe742,354681,1218.992,112,2782,049,8823.04
West Europe3,701,6203,707,850-0.1712,684,21112,485,2091.59
MEA906,7861,002,935-9.592,907,3153,020,064-3.73
North America5,171,2695,336,799-3.115,487,56015,527,380-0.26
South America1,185,1881,149,6253.093,488,2343,205,3378.83
Other331,728346,124-4.161,052,0401,058,557-0.62

Source: just-auto analysis

Global light vehicle sales seasonally adjusted annualised running rates (SAARs), Q3 2018

Q3-2018Q3-2017% ChangeAverage SAAR 2018 YTDAverage SAAR 2017 YTD% Change
Global94,520,83195,742,608-1.2896,247,70294,153,5132.22
Asia39,767,96540,424,509-1.6239,797,78039,012,8222.01
Indian sub-continent4,177,7844,186,297-0.24,319,7643,959,2559.11
Central Europe1,469,8601,277,25315.081,454,8051,299,73211.93
East Europe2,780,5553,049,486-8.823,052,8022,956,5553.26
West Europe16,686,35916,091,7643.716,892,64916,349,6773.32
MEA3,628,7384,152,539-12.63,890,6604,052,229-3.99
North America20,039,20920,696,421-3.1820,740,37320,809,586-0.33
South America4,622,1804,458,9993.664,692,0814,301,0109.09
Other1,348,1791,405,339-4.071,406,7871,412,646-0.41

Source: just-auto analysis

Regional issues ahead

North America

  • Will the US light vehicle market reach 17m (17.2m last year) units in 2018? Where does this leave 2019 looking and to what extent will manufacturers engage in an incentives war?
  • Keep an eye on the Fed and interest rates. Much depends on how strong the US economy looks; many forecasters expect the boost from fiscal measures to subside - which would suggest the Fed will be cautious and inclined not to raise them.
  • Will President Trump raise tariffs on Chinese imports further? Another round of tariffs has been suggested, but it could be aimed at bringing the Chinese to the negotiating table. Trump and Chinese President Xi Jinping are scheduled to meet at the G20 summit at the end of November and that will be a key event in terms of setting the subsequent tone for a ramping up or down of trade tensions between the two countries.

Europe

  • Will the West European car market hit 14.5m units - a historically high level - in 2018? If it does, where does that leave 2019 prospects?
  • How far will the loss of diesel share in the car market go? How quickly is electrification moving?
  • Can Russia's recovering car market continue to grow if energy prices stabilise? Will the rise to VAT scheduled for January 1, along with possible marketing campaigns, boost the Q4 market?

Asia

  • Keep an eye on statements from the authorities in Beijing concerning taxation or other support for the auto industry. It is most likely to be demand-side led, such as a reduction to purchase tax. The expectation of a tax change could lead to prospective customers increasingly holding off from purchase until the position becomes clearer.
  • How well are the economies of southeast Asia performing, especially in terms of financial stability given the strong US dollar? External account balances suggest that Indonesia, in particular, could be vulnerable.

See also: Global automotive market report - Q2 2018

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