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COMMENT: European trading conditions deteriorate further

By Dave Leggett | 14 November 2011

The sovereign debt crisis in Europe threatens a break-up of the euro currency and is leading forecasters to lower economic growth projections

The sovereign debt crisis in Europe threatens a break-up of the euro currency and is leading forecasters to lower economic growth projections

Worries over the state of Europe's economy and its prospects are persisting. If anything, those worries got more serious last week when the eurozone's financial crisis spotlight swung from Greece to Italy. It remains to be seen whether the political changes in Italy will be seen as sufficient to calm the markets and bring Italy's costs of debt financing down. The markets are looking for signs that the politicians in Europe have the whole situation under control, with a credible long-term plan for dealing with the underlying issues.

We're certainly not there yet. Big differences of opinion remain on how far countries in debt crisis should be bailed out by others and also on possible mechanisms to achieve greater economic integration alongside a common currency. On top of that, there are doubts on whether voters will even accept the austerity medicine and fiscal reforms that the technocrats say need to be administered to hold the eurozone together.

As the crisis rumbles on, projections for economic growth in Europe are being steadily revised down. Consumer and business confidence is waning. Many firms will opt for caution on investment programmes or decide to 'wait and see', projects put on hold. Austerity programmes may be necessary in some countries, but they reduce economic growth still further. And even relatively financially healthy Germany will experience lower export sales to depressed European markets.

What does this mean for the auto industry? There is still plenty of uncertainty on exactly how the economic crisis in Europe will pan out, but car demand in Western Europe looks set to weaken. In the worst-case scenarios, the West European car market could fall back to 11m units in 2012. And this time around, there likely won't be scrappage incentives to boost the market the way it was boosted in 2009. A more likely outcome is that the market will be nearer 12m units, perhaps as much as 10% down on 2011.

Trading conditions 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, not just Greece. Europe looks like being a troublesome region for automakers and suppliers alike for the next year – when comparisons with buoyant financial results this year will also be unfavourable. The focus will inevitably be on growing revenues in more profitable non-European operations and keeping a firm lid on costs in Europe while it stays in low-growth mode. The auto industry in Europe is in better shape to weather a downturn than it was in late 2008, but pressures for further cost restructuring will increase.

After several years of below trend weakness, 2013 could witness a strong car demand recovery if Europe's economic situation improves, the debt crisis largely overcome. There's a growing sense of inevitability though, that next year will be a pretty tough one in Europe.

See also:

The latest market numbers are here: West European car sales down 1.3% in October

Concern rising at GM over its European operations: GOLDING’S TAKE: GM’s value to the US Treasury is on the slide