Car sales in January were off to a good start and it was the seventeenth successive month of growth. It’s good that the market is growing again, but risks to recovery remain and trading conditions will remain tough across the region, says Dave Leggett.
When looking around the world at regional car sales and trends, Europe stands out as a very weak performer. Car sales in the region remain well below where they were at the last peak, around 2.6m units below if we consider the markets of Western Europe. A look at national car markets across the region in 2007 and 2014 shows the depth of the decline and the scale of the national deficits versus 2007’s high water mark. Perhaps unsurprisingly, Greece has the biggest percentage deficit but it’s a small car market. Things get more interesting when we look at where the bulk of the sales have been lost. That’s clearly Italy and Spain, with those two markets alone accounting for around 1.9m units of the shortfall, just over 70% of the 2.6m units lost.
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New car markets in selected European countries
2007 and 2014 (ranked by scale of market fall in units)
| 2007 | 2014 | %ch | Units change | |
| Italy | 2,493,106 | 1,359,616 | -45.5 | -1,133,490 |
| Spain | 1,614,835 | 855,308 | -47.0 | -759,527 |
| France | 2,064,543 | 1,795,885 | -13.0 | -268,658 |
| Greece | 279,745 | 71,279 | -74.5 | -208,466 |
| Netherlands | 505,538 | 387,835 | -23.3 | -117,703 |
| Germany | 3,148,163 | 3,036,773 | -3.5 | -111,390 |
| Ireland | 186,325 | 96,338 | -48.3 | -89,987 |
| Portugal | 201,816 | 142,826 | -29.2 | -58,990 |
| Belgium | 524,795 | 482,939 | -8.0 | -41,856 |
| Finland | 125,285 | 106,259 | -15.2 | -19,026 |
| Sweden | 306,799 | 303,948 | -0.9 | -2,851 |
| Luxembourg | 51,332 | 49,793 | -3.0 | -1,539 |
| Austria | 298,182 | 303,318 | 1.7 | 5,136 |
| Norway | 129,195 | 144,202 | 11.6 | 15,007 |
| Switzerland | 284,688 | 300,262 | 5.5 | 15,574 |
| Denmark | 159,347 | 188,612 | 18.4 | 29,265 |
| United Kingdom | 2,404,007 | 2,476,435 | 3.0 | 72,428 |
| Total | 14,777,701 | 12,101,628 | -18.1 | -2,676,073 |
What of the underlying condition of the European economy? Austerity budgets in many countries of the eurozone and the scale of the economic contraction of recent years continue to make the economic recovery a weak one. The level of unemployment remains worryingly high in some countries according to the latest data from Eurostat. Germany’s unemployment rate of just 4.8% – the lowest in the EU – compares with an eye watering 25.8% rate in Greece (Spain just behind Greece at 23.8%). The eurozone area rate of unemployment is put at 11.4%.
The current level of economic growth in Europe is not sufficient to put much of a dent in unemployment, especially in the southern European countries – like Greece – that are now seeing significant political opposition to austerity budgets emerging.
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By GlobalDataThe overall position of the European economy remains one that can be summarised as weak recovery. The IMF estimates that the eurozone economy grew by a measly 0.8% in 2014. It’s latest round of forecasts in January included a 0.2 percentage point downward revision to its 2015 growth forecast for the eurozone’s GDP, which now stands at just 1.2%. The picture for domestic demand is a weak one and slower sales in some key global emerging markets – like China – also contributes to the sluggish growth picture.
On the upside, lower oil prices could result in some tailwind for Europe’s economy if that extra income that many households will see translates into higher spending on goods and services. However, there is also a danger that comes with falling prices and it is one that the European Central Bank (ECB) is well aware of: deflationary economic effects. If prices of some goods are falling, consumers decide to wait for prices to drop further before purchasing. If they keep falling, a kind of economic paralysis sets in with markets seizing up, economic activity falls, unemployment rises and a long-term recession takes hold that is difficult to break out of. It happened in Japan and the ECB is worried that it could happen in Europe, which helps explain why it has resorted to quantitative easing to attempt to stimulate growth. Economic growth is needed to bring in higher tax receipts to government’s whose national balance sheets are far from healthy. Deflation could set off the eurozone’s debt crisis once again.
It’s a risk to the demand picture in Europe and to the car market. LMC Automotive analyst Jonathon Poskitt is concerned. “The evidence is that a sustained decline in prices leads to a general decline in economic activity,” he says. “If GDP contracts, then household incomes will fall, confidence will be dented further and car markets will inevitably fall. The fragile recovery that we have seen thus far in Europe would effectively be undone. Deflation is certainly a risk to the outlook if it really takes hold. We will have to see if it becomes a factor.”
However, while price deflation poses a significant risk to the European car market forecast Poskitt believes there are also some positives at work that could support growth in the European economy and car market this year. “Interest rates look set to stay very low and the ECB is now seriously looking at quantitative easing to stimulate the European economy. Yes, falling prices – due to the collapse in the price of oil – pose a risk. But those same falling prices are also putting extra spending money in pockets. If conditions are right and people do spend, that could provide a substantial boost. Also, the low level of the euro is good news for exporters in global markets.”
January’s car sales numbers came in fairly strong. LMC raised its forecast for the West European car market and now forecasts that this year will see a gain of 3% to 12.5m units. This, LMC said, reflects the impact of lower oil prices and an improved economic outlook in the region.
Over at IHS they are also seeing some positives early this year. Carlos Da Silva, manager for IHS Automotive’s European light-vehicle sales forecast, highlights confidence building measures from the ECB and says that there is some indication that the eurozone might now be on more solid ground, noting that the latest decisions by the EB are instrumental. “By formalising a quantitative easing policy to be launched in March, the ECB has stepped up and will be providing tools to prevent the region from entering a deflationary spiral – one of the main risks today. Through QE, the ECB will be putting more liquidities into the market which, normally, translates into improved lending conditions. For the vehicle market, this means credit should be more easily accessible. Considering that credit is the lifeblood of auto markets in general, this definitely carries a positive message.”
On top of this, Da Silva notes that there is “still plenty of pent up demand throughout Europe” thanks to the passenger car market having shrunk by a quarter between 2007 and 2013, while OEMs now have their product cycles and vehicle launch strategy back on track.
However, despite this positivity, Da Silva warns that the risks have not disappeared. Factors include the levels of public debt, which remains an ongoing issue for many countries, while Greece is again highlighting the inherent fragilities or contradictions of the eurozone, as well as the many difficulties the unsolved Russian/Ukrainian crisis still raises.
Da Silva also points to the nature of the current growth in the European passenger car market at present. Although replacement demand is playing its part, he believes that a fair share is largely artificial, driven by manufacturers pushing sales through “easier” channels – such as dealer self-registrations, fleet sales and daily-hire fleets in particular. He points to the French market as a good example of this. After a lacklustre end to 2014, the French passenger car market surprised on the positive side in January, jumping nearly 6% year-on-year. However, this was not due to private or business customers rushing back to showrooms – so-called “tactical sales” were up nearly 25% year-on-year he says, representing one out of four cars sold in January in France. It is also taking place in Germany and Italy, he maintains. And Spain’s recent market growth comes off a very low base. “Knowing that the Spanish boom is also largely artificially supported by scrapping incentives, this leads to a less rosy picture, doesn’t it?” he says.
IHS Automotive forecasts that new car sales in Europe will grow by around 2.2% this year to 12.87m units (on its measure of ‘Europe’) and notes that the market remains well behind the pre-crisis average of around 15.2 million units. We also do not expect the market to return to these levels at least by the end of the decade, when we see registrations standing at around 1 million units below that level.
Next few months will be crucial for 2015 outlook
The first quarter of this year will tell us a lot about how 2015 will pan out. The base for the annual comparison in Western Europe is the first quarter of last year when the West European car market was up over 7% on the previous year. We’ll get an inkling on just how robust 2015 is looking and whether or not underlying replacement demand can help build momentum in Europe’s car market, even if economic growth disappoints. And we’ll have a better idea of how two particular dark clouds are looking: Greece and Russia. At the time of writing, the EU’s financial crisis concerning Greece appears to have been contained. As many predicted, a compromise deal to cover Greece’s short-term financial commitments appears to have been reached, averting an immediate debt default. However, more negotiating will be needed over the next few months to put something more permanent in place. That will not be easy, the risk of a Greek exit from the euro still very much with us, along with the uncertainties that could bring for the European economy.
And Russia? The hope there has to be that we are over the worst of the economic crisis. We’ll see in the next few months whether the political situation causing some of the problems is easing, or not.
The next few months should also tell us something about the dangers of deflation in Europe. The collapsed oil price is still crunching its way through both annual price inflation calculations and price cuts in the real economy. Hopefully, we’ll see some lift to demand and GDP in the first quarter – aided by the ECB’s quantitative easing – and deflationary fears subsiding. There are also some signs that the oil price may settle a little higher this year.
At least January’s car sales figures were good and that gives some grounds for optimism. “The European new car market has had a strong start in 2015, continuing the trend from last year,” said Brian Walters, Vice President of Data at JATO Dynamics. “This gives the industry confidence that there will be demand for planned new models such as those being unveiled at the Geneva Motor Show next month.” Indeed.
See also:
BELGIUM: EU car sales up 6.2% in January
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