Blog: Dave LeggettIt's an upturn Jim, but not quite as we know it

Dave Leggett | 7 April 2010

Stock markets across the world have been trending strongly upwards over the past year. Investor optimism is perhaps founded on a view that the world economy is being supported by stimulus packages and strong growth in Asia, that companies are shedding cost and that concerns over the fragility of the longer-term outlook will actually help corporate profitability in the medium-term.

If the policy lever that is extraordinary fiscal stimuli goes into reverse at some point - as it must, given the public debt that is accumulating - then it will be even more difficult to raise interest rates in what is still a relatively low-growth economic environment in many parts of the world.

In short, the slow world economic upturn that took hold last year is playing out in a manner that is - thus far - relatively benign. Wholesale credit markets haven't returned to how they were, but frozen credit markets have thawed a little. The financial sector appears to have stabilised. And international trade tensions don't seem to have accelerated notably. Inflationary pressures remain largely subdued (but keep an eye on the oil price).

In that context, the latest US light vehicle sales numbers appear to confirm that we are some way off things getting back to 'normal'. Demand remains firmly subdued, even if higher than this time last year.

The March sales numbers showed a hefty gain on last year, but the seasonally adjusted annualised number was still south of 12m units - despite the liberal use of incentives by a number of manufacturers, led by under-pressure Toyota.

We are still looking at a volume recovery to this industry globally which is heavily skewed towards the big emerging markets. If anything goes wrong in these places, the auto industry everywhere will feel the chill wind.

But yes, things are probably progressing in a manner that policymakers back in late 2008 would have hoped and prayed for. It's a slow recovery in many respects, but one that is - thus far at least - a stable one. The public debt will take a long time to work off but is apparently not an immediate problem. Households in the West may have retrenched somewhat, but emerging markets are providing new sources of global demand. The auto industry is changing, but the industrial disruption wrought by this recession (eg in the US) could have been very much worse.

Alliances and collaborations in the auto sector remain key. Renault and Daimler's tie-up this week is the latest. Fiat's Marchionne will not want to stand still either.

Automotive companies, it seems, are still very focussed on taking cost out in what is still a crowded marketplace. Don't be fooled by the apparent good news and the improved look of some industry data. We're coming off a very low base. Car sales in Western Europe will likely decline this year. Risks remain in places like China and there is likely more restructuring ahead for many, even if things could be worse.


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