It’s a question that is moving to centre stage this month. What do the latest developments on the global economy and the current turmoil in the financial markets mean for the automotive industry? There is not a short and simple answer to that one. Complex forces and structural issues are at the heart of large imbalances in the world’s economy that are generating volatility as worries grow on whether a systemic failure is around the corner.

Another financial crisis and double-dip recession remains a worst-case scenario. Will it happen or will we muddle through? Will the imbalances correct themselves? The short answer is that there remains a high degree of uncertainty on how these things will play out and what the full impact will be on the so-called ‘real economy’. Investors are certainly spooked. What was looking like an upbeat recovery picture earlier in the year is looking less so now.

But how serious is it, really, and what does it mean for the auto industry?

The first thing to consider is that the auto industry has been faring relatively well over the last 18 months, the crisis for the supply chain surrounding the March 11 Japan earthquake notwithstanding. It has been a rapid turnaround from the dark days of early 2009. The latest round of largely positive financial results for the major vehicle manufacturers and Tier 1 suppliers illustrate how the industry has been able to squeeze costs and quickly feel the benefit of rising demand. Nowhere has this been more evident than in North America where Ford has been followed by General Motors in an unprecedented industrial turnaround and transformation. Even Chrysler, widely considered to be the laggard of the three, has renewed hope as a part of Fiat, CEO Marchionne most definitely switched on to the benefits that industrial integration can bring. It promises to be a much deeper integration than that of the ill-fated DaimlerChrysler creation.

The fact that Detroit car companies are posting profits with the US light vehicle market running at under 13m units tells us how far things have changed. Ford and GM also have well developed international market geography with a growing contribution from the high-growth emerging markets. Recovery in the US light vehicle market suggests an even better outlook for profits in the medium-term. And even the quality reputation problems of the bad old days have been largely banished according to industry surveys. Why they even have credible product available in the hot selling compact segments of the market (for example, the Chevrolet Cruze is riding high).

Which brings us to the question, what will happen in the US, which is still a hugely important market for the Detroit Three from a profits perspective (and also hugely important for the Japanese OEMs)? The short answer to that seems to be that the very short-term market outlook may have worsened lately, but let’s not get too carried away at this stage. This economic recovery was always going to be a long haul. A rise in the price of oil earlier this year hasn’t helped and neither has supply-chain disruption that has hit the auto industry in particular. But the auto industry in the US has been on a strong recovery trajectory. That won’t necessarily change overnight. The key thing is confidence and what that means for demand. Provided credit remains available, interest rates stay stable and the price of oil stays subdued, there is every reason to believe that the US auto market will get to at least 12.5m units this year (a number that would represent a significant gain on 2010’s 11.6m even if it is below some expectations earlier in the year). Industry forecasts are holding largely steady at the moment. The more gloomy economic news may not create the ideal backdrop for the car market, but in July – amid the US federal government debt ceiling wrangling – the US market managed a pretty reasonable 12.2m units SAAR. The US economy created more jobs than expected in July and the unemployment rate actually fell slightly. Yes, the revised economic growth figures suggest underlying weakness to the economic recovery, but it’s not that bleak yet (maybe 2% growth of GDP in 2011 versus earlier projections nearer 3%). Volumes are still going to be up, unless the economic situation deteriorates more severely. The light vehicle market is still way below pre-2009 ‘norms’, suggesting that there will be pent-up demand building and that demand ought to be fairly firm at current levels. Chief Economist Lacey Plache captured the mood from industry analysts when the US GDP numbers were revised down: “While today’s GDP numbers indicate a much weaker economy than originally thought, they do not change the fact that auto sales had good momentum in Q1’s sluggish economy, averaging 13 million SAAR for Q1, and this pace continued to Q2 in April until the tragedy in Japan impacted auto sales. This suggests underlying strength in demand for autos and is promising for the release of deferred demand from Q2 in the rest of the year. While the GDP results do not indicate a recent weakening over Q1, the sluggish recovery will remain a challenge for auto sales growth for the foreseeable future. The key challenge facing autos in the near term is the current uncertainty surrounding the debt ceiling in the US and the debt crisis in Europe. Growth in car sales should in turn provide a much needed boost to the economy.”
Moreover, Lacey believes that there is deferred demand likely to come on stream over the coming months. “Deferred demand that accrued during the recent supply disruptions caused by the Japan earthquake in March should support car sales in the coming months as production returns to normal and automakers rebuild their inventories,” he said. Lacey believes the US auto market will hit 12.9m units this year.

JD Power Automotive Forecasting analyst Jeff Schuster broadly concurs. “It’s still a recovery, but it’s one that is now likely to be on a flatter trajectory than we had been expecting earlier in the year. The market forecast for this year will be revised down as a result of a weaker economic picture,” he says. But he’s still looking at a number between 12.5m and 13m.

Schuster also notes that next year should see the US light vehicle market rise towards 14m units and contends that pent-up demand could underpin a stronger market. That’s not sounding too bad at all.

In Europe, the situation is arguably more serious given the ongoing uncertainties surrounding sovereign debt and the pressures on the euro currency. Austerity programmes have yet to bite and we are already seeing considerable market weakness emerging in a number of national car markets (especially Spain and Italy, but also France and the UK). Even the German market has lost some momentum lately (though the powerhouse German economy is still keeping the car market well ahead of last year). The move of the European Central Bank in buying Spanish and Italian debt is helping, but the problems facing certain nations look certain to keep economic growth – and vehicle demand – subdued this year and next. Germany may well continue to be something of a growth pole, but much depends on whether export growth to Asia (especially China) can be maintained. And German consumers’ confidence is also tied in to the broader problems impacting the eurozone. After the mixed picture that was 2011 – the West European car market flat or slightly down on 2010 – 2012 may turn out to be another disappointing year for the economy in Europe.

One ‘up’ story is growth potential in Europe’s east – Poland’s economy and car market is surging as is Russia’s. Another international financial crisis could hit these places hard again, but they are benefiting from low costs and good demand prospects. Ditto Turkey this year.

Are there problems afoot in Asia? Inflation is an issue in China, but the authorities have dampened down some pressures without an excessive adverse impact on demand thus far. The vehicle market remains lively, if growing less strongly than last year – in itself a sign that overheating is easing. China’s economy is continuing to grow at a rapid pace. The auto industry is seeing plenty of new investment, from local and Western firms. India’s auto industry and market is developing apace. 

Is all therefore well, dangers of a slide into global economic depression well and truly behind us? Such guarantees don’t exist. The worst-case scenarios involving a deeper economic downturn, worsening international financial imbalances, lending gridlock and a descent into trade wars can’t be entirely discounted. But the picture today is essentially of an uneven global economic recovery looking a little less upbeat than it did earlier this year. There are some major macro/political problems that require resolution, but they appear to be on ‘slow-burn’. More muddle through from Brussels can be expected. Germany’s leaders appear to be well aware of the bigger dangers that could come with a euro break-up.  

The automotive industry has been faring relatively well and still is. It will, however, face more challenging conditions and the shallow market recovery will be extended in some places, 2012 now looking more like 2011. But that’s still a big step forward on 2009.