Analysts at JD Power have told just-auto that there are signs of a slowing in the rate of decline of the West European car market and that underlying car demand is starting to pick up. However, the market is also projected to decline by 2.2% in 2011, reinforcing concerns over a shallow and fragile recovery.

“From the point of view of the selling rate, things are slowly starting to pick up,” says JD Power analyst Jonathan Poskitt.

He maintains that the picture is one of underlying improvement, although the comparison versus last year is still distorted by the diminishing impact of scrappage schemes. But November's 9.1% market decline compares with an 18.3% year-on-year drop in October.

“The schemes took a while to work through,” says Poskitt. “The year-on-year declines have been against incentive inflated markets, but that distortion is easing in the annual comparisons now.”

Poskitt also says the European car market is starting to benefit from a slowly improving European economy. Germany's economy, in particular, has perked up this year, led by a strong manufacturing sector and growth of exports. It may not be a sharp upturn but it is an upturn nonetheless.

JD Power estimates the annual West Europe car market selling rate for November at 13m units a year, significantly stronger than preceding months (July-October averaged just 12m units a year) though there is the suspicion of a push by OEMs to make their full-year numbers look a little better.

Germany's car market slipped back just 6.1% in November and Poskitt reckons it will turn positive in December. “By December of last year the impact in sales of Germany's scrappage incentive had really tailed off, so the pick-up to underlying demand being seen there will be against a weak market last year – December ought to be in positive territory.”

A look at the annual numbers for Germany illustrates the roller-coaster impact that scrappage incentives have had. Germany's car market in 2009 bucked the severe economic recession and grew by a staggering 23% to 3.8m units. But after the 2009 scrappage party, JD Power forecasts a rather hungover looking 2.9m units for 2010, rising to 3.1m units in 2011.

There may be cautious optimism for an improving market where Germany is concerned, but Poskitt is understandably cautious on prospects for the West European car market as a whole in 2011. Looming large in the background are the headline economic problems associated with sovereign debt, pressures on the euro currency, fiscal deficits and austerity budgets. The IMF recently concluded that Europe's financial system remains far from fixed; lending to consumers and businesses is still way off pre-crisis levels. And brisk demand for Germany's exports will be impacted if the global economy slows.

It's not exactly a macro background that is conducive to building still fragile business and consumer confidence.

And there are divergent national market performances depending on the duration of scrappage incentives and when exactly the tap was turned off. The UK car market, for example, is widely expected to see a reduction of 5-10% in 2011, a market of 1.8-1.9m units reflecting where real demand is now that the scrappage scheme is over. 

And the Spanish car market is currently desperately weak by recent historical standards, a 20% unemployment rate a stark reminder of how serious things have become there, a burst speculative property bubble intensifying the recession. The annualised selling rate of 820,000 units in November highlights just how far the market has fallen now that a scrappage scheme has ended. Pre-crisis the Spanish car market managed over 1.6m units for each of the preceding four years.

JD Power forecasts that the West European car market will turn out at 12.9m units in 2010 – some 5.6% under last year's 13.67m total. In 2011, the weak overall upturn to underlying demand struggles against a 2010 in which there was a scrappage boost element loaded towards the first half. The market for 2011 is forecast at 12.62m units, 2.2% down on 2010.  Those numbers compare with a heady 14.8m units in 2007.

Poskitt sums it up: “Yes, things are getting better for the European car market, but it's a slow recovery from a brutal recession. Now that scrappage incentives are off, we're seeing just where underlying demand really is.

“Scrappage incentives were seen as necessary to keep the auto industry ticking over in the depths of recession, but now they are gone the onus is on the European economic recovery to drive demand. It's shaping up to be a weak recovery with some major concerns present in the background. We may be slowly moving in the right direction as far as car demand goes, but it's looking like a pretty long haul.”

With the West European car market over 10% off pre-crisis levels and forecast to slip back further in 2011, some OEM capacity utilisation rates  - which picked up with the production uptick this year - will be dragged down further unless they can compensate with exports. That might be tricky to pull off.

After a 20% slump to overall European vehicle build in 2009, followed by a strong inventory fuelled rebound in 2010, overall vehicle build now looks set to stall.

There has been limited evidence of capacity rationalisation in Europe thus far – nothing like the scale of what has happened in North America. Certain governments and companies have long conspired to avoid closing plants. But is it a fudge that is sustainable in a flat or falling market and in the context of more production taking place outside of Western Europe? The big question for Europe's auto industry executives is an uncomfortable one and it is one that is on many minds. How much overcapacity in Europe remains and will it get taken out? If so, where?