The global car market is facing decline in 2003, led by market falls in North America and Western Europe. However, other regions of the world – led by East Asia – are seeing further car market expansion this year. In 2004, projections for livelier economic growth underpin the resumption of car market growth in Western Europe and North America. However, the trend towards an increasing share of global car demand being accounted for by emerging markets will continue.
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Key points:
- The global car market is projected to decline by 1.1% to 46.9 million units in 2003;
- 2003’s decline results from market falls in North America and Western Europe – all other regions are forecast to show growth;
- The global car market returns to growth in 2004, helped by livelier growth for the world economy;
- Emerging markets present the main opportunity for long-term car sales growth;
- Prospects for car market growth in Asia are extremely positive, but South Korea’s market declines this year;
- China’s sheer force of numbers presents the major long-term demand growth opportunity;
- Russia’s solid car demand prospects are clouded by risks surrounding the Russian economy;
- Brazil’s market decline this year and Argentina’s market collapse will, combined with currency devaluation and poor profitability, prompt manufacturers to re-assess their South American operations.
2003 – a strange year
The world’s economy is not in great shape this year, but things could be a lot worse. The conflict in Iraq, such a critical event for confidence in the West, turned out to be, at least in its initial military phase, a lot quicker and less prolonged than many had predicted. Also, fears of further terrorist attacks on a 9/11 scale or impact have not – thankfully – materialised. The longer we go without one, the more relaxed consumers will become (though the risks associated with such events have not gone away completely).
In Asia (not forgetting Canada), the SARS outbreaks threatened to get out of control and severely dislocate all forms of economic activity. Again, while the dangers have not been entirely eradicated, it is fair to say that progress against SARS has been at the better end of the forecasts that were emerging back in April. That is great news for the economies of East Asia in particular, which are accounting for an increasing share of world output.
But it seems inevitable that 2003 will not be a good year for global economic growth. High energy prices prior to the Iraq war and the general loss of confidence associated with it have deflated economies across the world. Consumer and businesses are still cautious about committing to spending. The recovery is taking time to gather momentum, but it should be increasingly evident through the second half of 2003.
But the dynamics of the world economy are also shifting and this year’s reactions to crises have emphasised that. The growing importance of China in global terms is beginning to look like an unstoppable steam train. But China as a growth anchor is also reinforcing the rising stature of the economies of South East Asia.
World economy recovers in 2004
The world economy is still seeing the effects of a sluggish first half, but there is growing evidence that the second half of the year will experience an up-tick that will accelerate into 2004. Retail sales figures in the US already indicate that consumers have responded to record low interest rates there.
But for 2003 as whole, industrial production has stagnated in the major advanced countries, accompanied by a slowdown in global trade growth; labour market conditions remain soft. And while global fixed investment has begun to turn up, it does not yet appear strong enough to sustain the recovery if consumption growth – a key support to demand so far in the upturn together with the turn in the inventory cycle – slows.
In emerging markets, financing conditions have improved, reflecting improved sentiment towards Brazil and – until recently – Turkey following the elections in those countries; the impact of actual and expected financial support from the international community, including the International Monetary Fund (IMF); and some improvement in risk appetite.
Lower oil prices will provide a boost to much of the world economy, and we continue to expect tax cuts to come into effect in the US later this year. But with the economic situation currently so fragile, firms in the advanced economies are failing to deal with their excess capacity problems. We expect business investment to remain weak until 2004. Overall, we do not expect the US to return to a trend pace of growth until the first half of 2004, with the eurozone lagging behind. The weak pace of recovery in the advanced economies is expected to hold many emerging markets back until mid-2004.
It will be some time before labour markets improve. In the United States, there has been aggressive labour shedding and employment has shrunk, but the unemployment rate is still lower than in the aftermath of recent recessions. Having remained fairly stable in the early phases of the downturn, unemployment in the euro area has recently been rising, especially in Germany, and now stands at 8¾ per cent of the labour force. In Japan, unemployment is currently near a historically high level, at 5¼ per cent of the labour force, as firms restructure.
Underlying inflation is generally low or trending down, with some exceptions (Canada and some smaller euro area countries). In the United States, rising energy prices early in the year and exchange rate depreciation have recently put pressure on headline inflation, but with a substantial output gap, the underlying rate of price increase will slow. In the euro area, where the output gap is widening sharply and rising oil prices have largely been offset by euro appreciation, inflation is projected to fall significantly. In Japan, deflation, rather than inflation, is still a major concern.
Global car market decline in 2003 is US – and Europe-based
The global market for passenger cars is forecast to decline by some 1.1% in 2003 to 46.9 million units. The decline is brought about by lower car demand in North America and Western Europe, both relatively mature car markets that have been adversely impacted this year by high energy prices and fragile consumer sentiment. The use by some manufacturers of substantial customer incentives – most notably cheap finance – in North America continues to attract controversy in the industry. While there is little doubt that incentives over time offer a diminishing return, manufacturers who offer them find it difficult to stop. But some market slack in the US should be taken up later this year and in 2004 as economic growth picks up. With US interest rates at a 45-year low, it looks as if some kick-start to the economy is coming, although historically high levels of household indebtedness will constrain the recovery. The replacement cycle should also be favourable to market acceleration in combination with improved economic conditions and consumer confidence. The US sees growth mainly based on cyclical drivers – such as replacement demand and economic growth – rather than ‘new’ demand (as in increased motorisation).
In Europe, the picture is similar – weak economic growth, fragile consumer confidence and a declining car market. There is also a growing worry that US-style customer incentives could migrate to Europe, with a similarly negative impact on manufacturer margins and profitability. But in Europe also, hopes are pinned on low interest rates to stimulate the economy and bring about a car market upturn. Worries over possible price deflation in Germany appear to have subsided for the moment, but the fragility of consumer confidence and its vulnerability to any adverse shocks or events is a common theme on both sides of the Atlantic.
Asia’s mixed bag
Japan’s car market is seeing growth this year and there has been some brightening in Japan’s economic news lately, but Japan’s economic progress is far from secured. The dangers of falling prices are all too evident in Japan’s experience of recent years. Recovery to Japan’s battered economy and car market will be gradual.
In Asia outside of Japan, growth prospects look extremely positive and we are confident that the region’s economy is becoming increasingly robust and less dependent on economic conditions in the US and Europe. South Korea provides the main gloom this year, its market facing a decline resulting from a host of domestic factors. South East Asia looks strong and was little affected by the geopolitical anxieties that racked consumers in the West earlier this year. With motorisation rates low, demand prospects in the long term are also extremely positive.
China’s 1.3 billion population and its rapid economic transformation make it the market that has particularly grabbed automakers’ attention in recent years. The Chinese car market is now estimated at 1.4 million units per annum and is expected to be over two million units per annum by the end of the decade. China’s economic expansion is being driven by domestic demand growth and massive inflows of foreign direct investment following WTO accession. With strong economic growth that is relatively invulnerable to external shocks, falling new car prices and large car-making capacity installation ahead, it is hard to see China’s market growth stalling over the forecast period.
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Russia’s growth prospects – how solid?
Russia’s car market is growing, underpinned by a restoration of economic growth and the increased supply of imports and western brand locally-made ‘new domestics’. Our central forecast sees steady growth in Russia – income levels are good for car market growth and economic growth continues in the 3-4% range. However, there are worries that Russia’s economic reforms are not happening as rapidly as they should. Indeed, economic growth this year has been heavily reliant on high energy prices and many point to Russia’s low rate of investment and low levels of foreign direct investment as indicating that Russia’s underlying economic ills still require radical action. For the automotive market in Russia, there is also an ever-present risk that the government could introduce protectionist measures to assist crisis ridden domestic makers. However, Russia’s WTO ambitions and its need to court inward investment make this unlikely in our view.
South America remains troubled
After Argentina’s severe economic collapse, it seemed that Brazil’s economic fundamentals and economic management were strong enough to prevent a similar catastrophe. But macroeconomic instability has returned to Brazil. A big part of the current problem is that Brazil’s real tumbled 35% against the dollar last year, causing inflation to spike and ultimately pushing the base interest rate to 26.5%, one of the highest levels in the world. The market this year faces decline.
The big question for South America is the extent to which vehicle manufacturers will be forced to consolidate, merge or even withdraw manufacturing operations. Suzuki is the first to announce that it is quitting the Brazilian marketplace. Others could follow. The market in South America was already fairly crowded and burdened with production overcapacity even before Argentina’s economic collapse and Brazil’s recent economic problems. We estimate overcapacity in the region at 50%. Something may give.
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