It is probably fair to say that the analysts and pundits are – in early 2012 – less certain about prospects for the year ahead than they were a year ago. Back then, it looked like the global economy – and automotive markets – were bouncing back quite strongly from the unprecedented recession of 2009. As volumes picked up in North America – alongside still healthy growth in the BRICs and other emerging markets – OEMs and suppliers experienced a surge in volumes which, combined with leaner post-recession restructured cost bases – quickly fed into better healthier bottom lines.
But by the summer it was becoming clear that Europe has a very serious structural problem, associated with large national debts (in part a consequence of emergency bank bailouts/recapitalisations in 2008/9) and a single currency, that has severe implications for economic growth prospects. The costs of borrowing were going up for countries with big debts and that lacked a credible policy response to their national deficits. And international money markets wobbled with the realisation that economic growth prospects were deteriorating, not helped by the continuing impact of higher energy prices on real incomes. While Germany’s economy has experienced an export-led boom driven by demand in Asia and a highly competitive euro currency, cumulative national debt problems have piled up elsewhere. Sovereign debt continues to loom large as a constraint to Europe’s projected economic performance. A region-wide fiscal contraction with ‘austerity budgets’ in many countries will inevitably reduce economic activity in 2012.
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The big fear is that a disorderly default on sovereign debt in Europe could turn into a bigger financial crisis that would hit the international financial system again. And Europe does not exist in isolation. If demand for goods and services in Europe falls, export sectors in other regions of the world will feel some consequences, meaning that the global economy is impacted. Moreover, the fiscal stimulus levers that offset the impact of recession in 2009 (for example through scrappage incentives on cars in Europe) won’t be available this time round, given the state of public finances.
‘Mild recession’ expected in 2012
The upshot of the deepening of Europe’s sovereign debt crisis is that economic growth projections for 2012 have been revised down. Following a strong showing in early 2011, the economies across Europe now face the prospect of a pronounced slowdown, as global growth has softened, risk aversion has risen, and strains in Europe’s sovereign debt and financial markets have deepened, according to international institutions such as the IMF.
The euro area economy is now expected to go into a mild recession in 2012. The IMF says that a significant downward revision for the euro area (1½ percentage points) since September is due to the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation announced by euro area governments.
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By GlobalDataThe IMF also notes that downside risks are significant, and a further deepening of the euro area crisis would affect not only developed Western Europe, but also the countries of Central and Eastern Europe, given its tight economic and financial ties.
In its latest projections (January), the IMF forecasts that the euro area’s economy will contract by 0.5% in 2012, a decrease of 1.6% relative to the IMF’s September 2011 projection. GDP is forecast to contract by 2.2% in Italy and 1.7% in Spain. The German economy is projected to grow by just 0.3% in 2012 (France is projected at 0.2%, UK at 0.6%).
Fiscal austerity programmes across the region, low consumer confidence, higher unemployment and the continuing sovereign debt/financial crisis in the background look set to make 2012 a challenging year for business in Europe.
Worst case scenario
What’s the worst that could happen in Europe? That’s a rather big unknown and depends on the nature and depth of any highly adverse economic events. Let’s say the eurozone starts to break up and that leads to a general banking crisis and a sharp economic recession. The crisis of 2008/09 gives us some assistance in terms of benchmarks.
“If a disorderly default were to happen, a much more severe drop in the car market would be unavoidable,” says Jonathan Poskitt of LMC Automotive. “But there’s a big range of outcomes in terms of the immediate event, its knock-on impacts – for example on the banks and liquidity generally – and the government policy responses that might follow.”
Poskitt refers to the sharp drop in demand when the financial crisis and recession kicked in late 2008 and into 2009. “We saw the West European car market suddenly collapse to a running rate of around 11m units,” he says. “That gives us a guide to the kind of thing that might result if Europe’s crisis takes a sudden turn for the worse. A disorderly default in the eurozone might produce something similar if its effects weren’t contained and spread quickly into a broader regional financial crisis.”
But the picture need not be as bleak as some of the worst scenarios suggest. A European economy bumping along but with the broader crisis for the euro currency being effectively managed would probably serve to gradually reassure the markets and bring about the conditions for a modest economic upturn in 2013. Interest rates will remain low. Inflationary pressures are generally subsiding (oil price key though) and cooled down wholesale banking markets will warm up again over time, the longer we go without a Lehman-style lurch and as confidence returns. As the US experience shows, rising pent-up demand after dramatically reduced markets and put-off replacement will eventually turn into new vehicle sales.
Market forecasts for 2012 revised down
LMC Automotive has made a significant downward revision to their Western Europe car vehicle market forecast for 2012 as economic growth projections are revised down. A 5% car market decline in 2012, to 12.15m units, is now forecast.
A forecast car market of 12.15m units in 2012 compares with a pre-crisis market in 2007 of 14.8m – a drop of almost a fifth.
“It is looking like we are facing a difficult year in 2012 given the wider economic news coming in, the eurozone crisis still not resolved and what is happening to selling rates across the region,” says Poskitt.
“A mild economic recession in Europe is looking very likely and that will inevitably mean that car markets will be depressed.”
The bottom fell out of certain European car markets last year as austerity programmes – or the threat of them – started to take effect. The Greek, Italian and Portuguese car markets were each down by almost a third on 2010.
Poskitt points out that prospects in some of the larger markets are providing cause for growing concern. “Italy and Spain are looking desperately weak,” he says.
Italian car sales continue to be a cause of concern with the economy facing a renewed austerity programme under its new president. The selling rate for the final quarter of 2011 stood at just 1.7m units a year and with the economy continuing to struggle, the market could slip further in 2012.
The Spanish annualised selling rate sunk to under 800,000 units in the final quarter of 2012 and was at its weakest since 1995. “The way the market has deteriorated in recent months, combined with the worsening economic outlook, means we could well see the Spanish market registering another fall in 2012 – even below this year’s depleted level,” Poskitt says.
What about the German market? Germany was the only major market in the region to register an improvement in 2011 versus 2010. It was helped by a strong start to the year, when consumer confidence was soaring helped by low unemployment. However, LMC said that the market has moved down a gear since the worries over Greek debt intensified and consumer confidence has fallen back sharply. For 2012 LMC forecasts that the German car market will fall back to 3.1m.
“The German market is losing momentum,” Poskitt maintains. “On current estimates it won’t fall far next year, but we’re currently assuming a 2% drop.”
The French car market saw a strong start to 2011 with the spillover of scrappage scheme registrations from late in the previous year, with the first quarter 2011 seeing a selling rate of 2.53 mn units/year. Since then the selling rate has averaged a reasonably respectable 2.1 mn units/year though inevitably a tougher economic environment, and no equivalent boost in Q1 2012, will see the market lower for the 2012 full year. However, there is speculation of more government support for the auto sector, with details expected next month.
And the UK? Automotive experts at PwC have warned that the UK car market will continue to be affected in 2012 by worsening economic and employment prospects. Last year saw a 4.4% drop in car sales to 1.94m. Private retail demand remained particularly weak, falling by 13% in December and 14.1% for the full year. For 2011, UK private registrations accounted for just 42.4% of the market compared with 47.2% in 2010. Registrations in 2011 were supported by fleet sales, as many operators opted to replace vehicles after a period of delay.
The SMMT said that UK car market is forecast to be ‘broadly stable’ in 2012, with firmer recovery expected in 2013.
Michael Gartside, senior analyst with Autofacts, PwC’s automotive forecasting service is a little less sanguine. “With the economic outlook deteriorating and unemployment forecast to increase further in 2012, we anticipate a 3% decline in new car registrations to around 1.88m units,” he says.
“Continuing economic uncertainty and the potential for an escalation of the eurozone debt crisis, presents clear downside risks to this forecast. Assuming there is no further deterioration we could still see signs of improving demand within the second half leading to a full recovery in demand from 2013 onward.”
The first half of the year is likely to see particularly steep year-on-year declines in sales versus relatively strong market numbers in early 2011. It should also become clearer how deep the ‘mild recession’ is actually going to be and where the eurozone crisis is heading.
Europe’s automotive supply situation not as bad as 2008/09
There’s some comfort to be derived from the lessons learned after the 2008/09 experience. Inventory is much more in line with demand. The resultant downturn for the industry will be much less severe than that of late 2008 and early 2009 because there is less of a surplus stock problem this time round. Back then production was running way over the suddenly sharply reduced market, forcing dramatic actions – such as plant furloughs – to reduce inventory.
With the market down in 2012, Maher says there will be an accompanying adjustment for the region’s vehicle manufacturing sector with a drop to Europe’s light vehicle production total of 6.5% forecast (to 19.1m units in 2012). Within that total, higher demand in Eastern Europe supports output there to produce a small gain (0.6% to 6.5m units) while Western Europe’s production is forecast to fall by 9.7% to 12.6m units.
“That is serious, of course,” Maher acknowledges. “But it’s less severe than what we saw in the last big downturn of late 2008 and 2009 when the industry was burdened with around 2m units of excess stock and we saw output contract by 20%. Without that stock problem, output then would have fallen by more like 10% – half of the collapse to production that occurred was therefore down to destocking.
“Currently, industry stockholdings are fairly well managed and, depending on the severity of the downturn to demand predicted for 2012, the industry is not starting with a major stock overhang.”
Maher notes that Ford, PSA, Renault, Toyota and Opel have all announced plans to trim production and that some new model programmes are also slipping. And some premium OEMs are still working hard to meet strong orders from Asia, he says. “From an industry point of view, it’s a very different situation from that which we were faced with in late 2008,” he says. “We believe that the industry will continue to work hard to avoid a repeat of the 2009 stock crisis. In general, we expect OEMs to remove individual lines and thus capacity as and when new models are introduced – politically this is much more achievable in Europe.”
Light vehicle exports out of Europe are forecast by LMC to have risen by over 400,000 units in 2011 to exceed 3m units, with North America and Asia accounting for much of the growth. Overall vehicle export flows from the region are expected to stay at around that level in 2012, highlighting that next year’s volume drop is being caused by the impact of economic difficulties in Europe.
Nevertheless, pan-European light vehicle production of 19.1m units in 2012 would still be significantly above the 2009 nadir of 16.7m units after the strong bounce-back since then (helped by European scrappage incentives in 2010 as well as the steady export boom to North America and Asia). However, LMC Automotive doesn’t see the total getting back to 2007’s pre-crisis 22m unit level until 2014.
Summary
Trading conditions in Europe have already become tough for OEMs, with discounting of new cars sharply up in recent months as demand for cars softens in many markets across the region. The spotlight in 2012 will be on the eurozone’s financial crisis, which also carries significant downside risks. Even if the crisis does not worsen, economic growth will slow and car markets will suffer.
Overall, Europe looks like being a troublesome region for automakers and suppliers alike in 2012 – when comparisons with buoyant financial results this year will also be unfavourable.
However, the auto industry in Europe is in much better shape to weather a downturn than it was in late 2008, due to leaner inventory. Pressures for further cost restructuring in Europe will likely increase.
One bright spot derives from the duration and depth of market weakness since late 2008. Pent-up demand ought to be building. When conditions do improve, the upturn could be a surprisingly strong one. 2013 may see economic growth picking up, car buyers returning to the market. If that proves to be so, auto industry executives in Europe will no doubt be united in one simple thought: not before time.
| Car market (m) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012F |
|---|---|---|---|---|---|---|---|---|
| Western Europe | 14.7 | 14.8 | 14.8 | 13.6 | 13.6 | 13 | 12.8 | 12.1 |
| Germany | 3.3 | 3.5 | 3.1 | 3.1 | 3.8 | 2.9 | 3.2 | 3.1 |
| France | 2.1 | 2 | 2.1 | 2.1 | 2.3 | 2.2 | 2.2 | 2.1 |
| Italy | 2.2 | 2.3 | 2.5 | 2.2 | 2.2 | 2 | 1.8 | 1.7 |
| UK | 2.4 | 2.3 | 2.4 | 2.1 | 2 | 2 | 1.9 | 1.8 |
| Spain | 1.5 | 1.6 | 1.6 | 1.2 | 1 | 1 | 0.8 | 0.8 |
| Sources: ACEA/LMC/just-auto |
