Car Makers To Lead Global Economy Out Of Financial Turmoil

Turmoil on the world’s financial markets, set off by the debacle in Greece, will undermine consumer confidence and help to push European car sales down for the rest of 2010. That’s no surprise.

But Moody’s Investors Service says the industry’s underlying strength will enable it to lead the global economy to recovery, while Europe’s car sales will recover next year.

Other experts see at least another year of pain in Europe before the recovery sets in.

Moody’s, in a report, said the 2010 fall in West European car sales will not be as bad as it originally thought and are now likely to slide by 12 per cent, not 15 per cent. Sales in 2011 will turn firmly positive with a five per cent gain, the ratings agency said.

Moody’s is surprisingly upbeat about the industry’s future and the pace of its likely recovery.

“Global automotive demand cycles are more volatile (than other sectors) and thus will show a faster and steeper recovery than most economies. Moreover, due to the high leverage resulting from significant reduction in fixed costs, improvements in (vehicle manufacturers’) operating performance is strong at this early stage of the recovery. Therefore, we believe the fundamentals of the industry are now positive, as reflected in our change in sector outlook,” the report, which changed its rating of the industry to “positive” from “stable”, said.

Bank of America Merrill Lynch reckons that this is too sanguine a view, at least in Europe, where many forecasters are putting back the date for recovery because of shell-shocked consumers.

“Consensus still assumes (European) sales and production recovery for the region in 2011. This looks increasingly optimistic, in our view. We simply do not think that buying a new car will be anywhere near a priority for Europeans in the next 18 months in a context of public spending cuts, rising taxes and retirement systems’ reforms,” Merrill Lynch said in a report.

No Rally In 2011
Merrill Lynch reckons sales in Western Europe will fall 10 per cent in 2010, and slip another one per cent in 2011.

Pete Kelly, Senior Director at J.D.Power Automotive Forecasting, predicts a 7.4 per cent fall in 2010, with sales in Western Europe at 12.6 million. Any recovery won’t be apparent for a while yet, as sales slip again, by about two percent in 2011 to 12.4 million, according to Britain-based Kelly. Sales will eventually turnaround and reach 14.9 million in 2015, finally bringing Europe back to pre-crisis sales levels.

Kelly said the crisis which started in Greece forced earlier economic action by European countries than they had planned. Governments had feared that taking action early to fix deficit ridden economies, strained welfare states and bankrupt state pension funds might have jeopardized the recovery. Now they fear that if they don’t act quickly they will be targeted by speculators and forced into even more unpalatable cuts. Europe is suffering more than the U.S.

“The U.S. looks more capable to use growth to close the gap between spending and government income, simply because Europe doesn’t grow (economically) as quickly as the U.S. does usually, so it’s always likely to hit Europe more,” Kelly said.

Walt Madeira, manager of European vehicle sales forecasts for automotive consultancy CSM Worldwide, agrees with Moody’s that the recovery will start in 2011.

“In 2010, we still see a drop of 10 per cent. The first quarter was quite strong, the second quarter softened, then we look at the overall year and see it falling quite drastically as incentives run out,” Madeira said.

“2011 will be stable with sales up 2.6 per cent. Not a very strong recovery, but it shows the market balancing out at a level where it should be. Meanwhile the global economy is still in first and second gear, steady but slow,” Madeira said.

Worst Over By 2012
“Further out, we see a much stronger 2012 so we think the worst will be over. In 2012 we see a hike of about eight per cent to sales of just under 15 million,” he said.

As the European market starts to dive, the mass car manufacturers like Renault and Peugeot-Citroen of France, Fiat of Italy, and GM Europe owned Opel and Ford Europe, will find it hard to avoid losing money. But the German luxury car makers BMW, Mercedes, VW’s Audi and Porsche will find themselves in a much stronger position. The financial crisis which has spooked Europe has also caused the euro to crumble against the dollar.

Moody’s also aired the possibility of an outcome where all the above bets are off.

“We also cannot rule out the risk that the global economy will follow a darker path, a scenario in which recovery in 2010, if one emerges, takes the shape of “L” – signifying years of little or no economic growth for most major economies.”

Moody’s said this would raise the possibility of global automotive manufacturers facing negative ratings within 12 to 18 months.