Analysts at JD Power Automotive Forecasting have slashed their forecasts for European light vehicle production as a result of the recent deterioration to the economic picture in Europe.

“August has proved to be a turbulent month as equity markets crashed and Eurozone sovereign debt tensions intensified,” says JD Power analyst Arthur Maher. “Moreover, the ability of policy makers to successfully handle this crisis now been brought into question.”

Maher believes that the financial markets have lost confidence in the ability of Western policy makers to manage the massive debt overhang without imposing substantial costs. “Fiscal austerity is very much the preferred policy stance in the developed world and so the outlook for the European consumer is grim,” he adds.

In its latest assessment of European market prospects, JD Power says that Europe faces ‘long-term severe economic underperformance’. As a result, it has revised down its forecasts for European light vehicle production for 2012 (-820,000 units on the previous forecast) and 2013 (-1.05m) and beyond. Previously, the forecasters expected the recovery to volume to continue in 2012, but JD Power now forecasts European production at just under 20m units in 2012, down 1.4% on 2011’s 20.2m.

While the problems for the European market have mounted this year, some European vehicle makers – most notably the premium brands – have continued to benefit from strong demand in other parts of the world, especially Asia. Maher is cautious about whether that can continue.

“A vital factor for the European sector will be its performance in export regions but even here the ground is starting to look shaky,” Maher maintains. “Both the US and China are currently magnets for European OEMs, but overall export volumes look set to be negative in 2012.”

One bright spot in JD Power’s latest analysis is the receding impact of the Japanese components crisis on European production. It says that production is now largely normalised, though repair and maintenance dealers are still reporting component shortages as OEMs prioritise final assembly operations.

Toyota and Nissan have resumed normal production and Honda expects to do the same in September, JD Power says. JD Power estimates that there was a reduction of around 80,000 units in European production in the second quarter due to parts shortages, but it expects this to be fully recovered before year-end.