For January’s management briefing, we review developments and prospects for vehicle demand in the major regions of the world. Dave Leggett considers the state of the global economy and world vehicle market.

Cautious optimism is being expressed by the major international economic institutions on the outlook for the world’s economy in 2014. Five years after the global financial crisis, the world economy is showing signs of bouncing back this year, pulled along by a recovery in relatively high income economies and some strengthening of demand in developing economies.

In its just released January forecasts, the World Bank forecasts that the world’s economy will grow by 3.2% in 2014, in real terms, which compares with 2.4% in 2013. It may still be a fragile and weak, but Europe is forecast to move out of recession this year. The US economy strengthens a little. The situation in China looks stable with economic growth at a sustainable 7.7%, with the government’s strategy to rebalance the economy towards a greater role for domestic demand (as opposed to investment and exports) on track.

The International Monetary Fund (IMF), in its latest forecasts, noted that momentum for the world economy strengthened in the latter half of 2013, and should strengthen further in 2014 – largely due to improvements in the advanced economies of the West. However, it also said that global growth remains stuck in low gear, below its potential and it warned of significant risks. With inflation running below many central banks’ targets, there is a danger of price deflation (and a decades’ long Japan style slump that would bring).

The IMF also noted that there are risks arising from financial market turbulence and the volatility of capital flows. The World Bank warns that growth prospects remain vulnerable to the impact of the withdrawal of economic stimulus measures (‘quantitative easing’) in the US. Business sentiment and capital flows across the world remains sensitive to the prospect of any upward movement to interest rates.

Christine Lagarde, Managing Director of the IMF summed it up neatly in a speech in Washington last week: “This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous in another way – the year in which the ‘seven weak years’, economically speaking, slide into ‘seven strong years’.”

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The global automotive pie keeps growing

Data compiled by LMC Automotive suggests that the global light vehicle market totalled 84.2m units in 2013, a new record and 4% up on last year (itself a record) helped by a surge in the latter part of the year in China and a number of other markets. That’s a big number and it is reassuring to know that it is growing – mainly courtesy of China and the US, the two biggest markets, both in positive growth territory.

LMC noted that a strong December in China, improvements in Europe and a solid outcome in North America all contributed to the record level of sales. However, LMC said that the “remarkable” 88m units a year annualised selling rate in December is not likely to be sustainable in early 2014, though “we expect continued expansion for the year in total”. Well, that’s not too bad is it? Another year of global growth is widely forecast for 2014.

The two biggest car markets – China and US – set for 2014 growth

China’s light vehicle market – the world’s largest, by a considerable margin – exceeded 21m units in 2013 with a growth rate in excess of 10%. It has been a vital growth pole for the world’s auto industry over the past half-decade and will likely continue to be. General Motors now sells more cars in China than it does in the US.

The market in China is projected by the professional forecasters to grow to 33-35m units a year by the end of this decade, underpinned by rising replacement demand – reflecting ongoing growth of the vehicle parc – plus still rising new demand from the tide of mass motorisation. Average incomes in China are forecast to rise from around USD8,000 a year now to USD14,000 a year by 2020. That will bring with it a rise in per capita car ownership [cars per thousand population] from 50 currently to an estimated 150. China still has plenty of untapped demand potential. Some caution is needed though, as any regular visitor to China’s major eastern cities will appreciate: transport infrastructure and air quality in urban areas are emerging as areas of major concern for China’s policy makers.

Local analysts say that that emerging concern in China acts as an incentive for consumers to rush to buy cars, as an increasing number of major cities are imposing restrictions on vehicle sales in order to reduce air pollution and traffic congestion. Nonetheless, the market is expected to remain strong this year, boosted by rising demand in inland provinces.

The other big driver for the global vehicle market in 2013 was the continuing recovery of the US market. Light vehicle sales in 2013 reached 15.6m units, 7.5% ahead of the previous year. The US economy may not be firing on all cylinders in this economic recovery, but the auto sector continues to benefit from low interest rates and pent-up demand. It will take only modest growth to hit the 16m mark in 2014, a far cry from the low point of 10.4m units hit in 2009. Underlying fundamentals remain positive for 2014 though the rate of expansion is likely to slow.

Canadian light vehicle sales also contributed to the strong North American performance with a new record market of 1.74m units in 2013.

Europe faces low growth in 2014

Last year was another very tough year in Europe’s car market, which contracted again by around 2%. Acea data shows that Europe’s new car registrations declined for the sixth consecutive year in 2013 and that the market was at its lowest since 1995. New car sales in the EU dropped 1.7% to 11.85m units in 2013.

Across the region national car markets have collapsed, leading to even higher manufacturing overcapacity and yet bigger holes in industry profitability. Italy’s car market has fallen from 2.2m units in a ‘normal’ year to 1.3m in 2013. There was a lot of fizz in some car markets before the 2009 crash; Spain’s car market was up to 1.5m at its peak and is now nearer 700,000 units a year (it grew in 2013, but be careful with growth percentages off depleted bases). Some smaller countries’ car markets have been devastated by the economic crisis. The Greek car market used to total over 250,000 units a year. It now hovers at around 60,000 units.

The EU macroeconomic background, though improving, remains highly unfavourable to a recovery of Western European car sales to ‘normal’ levels anytime soon. GDP growth in the eurozone is negligible, unemployment will remain stubbornly high, with austerity budgets firmly in place for years to come. The best that can be hoped for is a degree of economic stability and a sustainable, if slow, recovery. We could be looking at a 2014 Western Europe car market up 2-3% on 2013; that would merely take it to where it was in 2012. On that basis, pricing pressures look set to stay. Recovery in Western Europe looks set to be a long haul. Nevertheless, the market is in positive growth territory again. Some national car markets have plumbed new depths of depletion and that could mean a stronger bounce back at some point as replacement demand upticks, given economic stability and an uplift to confidence. Long-term structural problems remain, but analysts say that 2015 could see an acceleration to demand.

Other Asia

Things have brightened in Japan in recent years as the government has hit the growth levers for the economy. After years of stagnation, so-called ‘Abenomics’ has brought a devaluation of the yen and some upturn to confidence generally as the economy has picked up. Even the long depressed Japanese car market has shown signs of life in recent years. But 2013’s car market, overall, was flat. It suffered as green incentives to consumers were withdrawn. However, the fourth quarter saw a sales spike related to purchases being brought forward ahead of a planned increase to Japan’s sales tax (5% to 8%) in April 2014. Manufacturers are also gearing up production for strong sales in the first quarter. Expect car sales to be leaner after that, though the government is planning to reduce the vehicle acquisition tax. The outlook in Japan is for a strong first quarter and lower demand after that.

The South Korean market finished 2013 with sluggish sales. The December selling rate was a lacklustre 1.45m units a year and in 2013, total light vehicle sales declined slightly for the second straight year. The outlook remains fairly flat in 2014 reflecting an export driven economy that has been adversely impacted by the rise of the won relative to a weakening Japanese currency.

India’s vehicle market was hit by a slowing economy in 2013 and 2014 is also looking weak. The depreciation of India’s currency led to a spike in inflation that hit middle class households hard last year. At the same time, the costs of financing and fuel have also remained high – two other important considerations before making a new vehicle purchase. Many vehicle manufacturers have been forced to raise vehicle prices due to the depreciation of the rupee. While long-term prospects remain bright, 2014 looks like a year of consolidation for India’s automotive sector.

Thailand, ASEAN’s biggest market, has also hit something of a bumpy road. Incentives timing is not good for 2014 (exhausted demand, so payback time) and ongoing political unrest looks set to dampen consumer confidence. The market fell back in 2013 and a further fall is likely in 2014 (Toyota says 14%). Demand prospects for the rest of the ASEAN region in 2014 look flat or low growth at best.

After a record 2013, market prospects in Australia remain relatively upbeat, though with sales plateauing at a high level (the main worry for Australia is trends in local manufacturing). Australian new car sales are forecast to hit a new record this year. The local automotive trade association, the Federal Chamber of Automotive Industries (FCAI) expects that 1.145m vehicles will be sold in Australia in 2014, around 1% up on 2013.

South America

In Brazil, 2013 ended on a weak note, with December registering a selling rate of 3.5m units a year. In 2013 as a whole, total light vehicle sales fell by 1.7%, the first annual decline in at least a decade. Despite tax cuts, tight credit by banks hit by loan defaults in recent record years slowed sales. The 2014 sales outlook is not so promising, with high inflation and interest rates continuing to constrain sales.

Argentina is something of a wild card. LMC Automotive notes that Argentina’s notoriously volatile market continues to surprise. The selling rate soared to a historical high of 1.1m units a year in December after falling sharply in November. Yet such a robust rate is unlikely to be sustained in the face of rampant inflation and a looming financial crisis, LMC maintains.

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