Blog: Dave LeggettWorld economy to get support from China?

Dave Leggett | 9 September 2011

The likelihood of the developed world entering a prolonged phase of sluggish economic growth that will last some time seems to have increased lately, whether or not we're actually in for another recession. Lower growth is perhaps the best scenario when looking at 2012. A much more serious risk is of another banking/financial crisis bringing a more severe downturn with governments having less room for stimulus packages than was the case in 2008/09 (and interest rates cannot go any lower than currently...).

For companies in the auto industry it's a complex picture when planning for next year. There does seem to be a determination at national government level in Europe to prevent the euro currency from breaking up. That's perhaps a good thing, but still leaves the awkward questions of whether or not voters will accept austerity packages, whether they are actually sufficient to maintain stability, how certain economies need reforming to bring a higher degree of fiscal policy consistency...the authorities and policymakers certainly have their hands full. Voters across Europe are not at all happy. The German government - effectively the euro currency's guarantor - has a particularly hard sell to its electorate. But a much harder currency for Germany after a potential euro break-up would make things very tough for German companies who have been doing very well around the world. The euro has, in many respects, been a very good thing for the German economy. 

But the picture in emerging markets remains much brighter. Worries over inflation may be starting to recede and policymakers in China may be starting to consider pumping their economy up again. China's exports will be impacted by sluggish economic growth in the US and Europe, so they wouldn't want to ignore that. If demand in the developed world stays weak, some respite for auto sector companies in Europe and the US may well continue to flow from emerging markets.

A low-growth scenario in the mature automotive markets next year (would still see the US vehicle market growing from its current way below trend level) plus still strong growth from emerging markets could actually create a 'not too bad' situation for the auto sector in 2012. That's assuming that the structural problems for the world economy are managed to be at least 'under control', with confidence generally held up above a floor as consumers and businesses experience a degree of stability. And much could depend on the willingness of the Chinese authorities to step on the stimulus pedal.   

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