Blog: Dave LeggettNearing the bottom?

Dave Leggett | 6 April 2009

We are obviously in the midst of a pretty serious recession – with the automotive industry one of those in the frontline - but things could, perhaps, be even worse. Economists are saying that some of the indicators that started falling off a cliff in the fourth quarter of last year are at least showing signs of bottoming.

And even in the bruised and battered automotive sector there are tentative signs that the deterioration to business activity is slowing. The US light vehicle sales figures for March released last week were better than expected. Yes, the numbers were bad, but showroom traffic is apparently picking up.

And in Europe, scrappage incentives are helping to lift the car market off the floor – most notably in Germany - which was 40% up in March. Government stimulus packages are supporting markets elsewhere, too.

Later this year and early next, the massive stock adjustment taking place in the industry should have largely worked through, with car plants able to actually raise production again. We won’t be back anywhere near 2007 levels, but output will be commensurate to where the market has eventually bottomed out.

There are important caveats to this relatively benign - and fragile – recovery scenario. The global economy needs to show stabilisation, with no new or deeper financial crises. Another round of bank failures and emergency bailouts (if affordable) would shatter talk of recovery. And world trade needs to survive the growing temptation by governments to opt for protectionist policies.

This is a synchronised downturn with a badly damaged financial sector that requires a long-term adjustment – the so-called ‘deleveraging’ by households in the West that were financially overstretched. That adjustment won’t happen overnight. In the short-term, governments actually want more consumer spending not less, to mitigate the impact of this recession.

And consumers are wary about spending when they see unemployment – a lagging indicator - going up. Even with paltry interest rates, they are now saving more and spending less.

The rebound in stock markets last week – also embracing some car firms – is obviously welcome. But just as this recession differs from previous ones in its origins, so will the recovery. It may be a long haul with some blips on the way.

And car markets in the developed economies probably won’t get near to previous peaks anytime over the next five years. However, if they are sustainable markets, with financing available at levels that are healthy – for lenders and consumers – that’s no bad thing.

And emerging markets – less indebted at the household level - could bounce back much more strongly as motorisation gathers pace again.

A market floor, if indeed that’s what we are looking at now in some places, is an essential start.

US: March sales defy doomsayers


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