Car Sales Accelerate, But Discounting, Profit Worries Mount.
“the German economy has simply reached the end of its long positive virtuous circle”
On the surface, car sales are continuing to improve in Western Europe, but rumblings behind the scenes suggest that all is not well.
Latest figures from LMC Automotive show Western European car sales jumped 8.8 per cent in July to 1.09 million, helped by better demand in Germany and signs of recovery in Italy and Spain. Worries about the future of the eurozone receded as Greece hung on to its membership of the single currency. LMC Automotive also raised its prediction for sales growth in 2015 to 7.0 per cent and 14.5 million, from its previous month’s forecast of a 6.0 per cent gain for the year.
But Bernstein Research analyst Max Warburton said recent half-year financial reports were confusing, with many contrary trends, and he worries that unseen pressures are building up.
In a section of a report headed “Get ready for the post summer break profit warnings”, Warburton said despite being behind budget in China, companies have held off warning that profits may fail to reach targets.
BMW has already gone close to doing this with its statements about problems in China. VW is under pressure there too, and Daimler’s Mercedes-Benz, despite spectacularly bucking the trend in China, can’t fight this forever, Warburton said.
Warburton reckons that the good times might be coming to an end.
“We believe global auto earnings will be proven to have peaked in 2015 – as China’s era of supernormal profitability rolls over and U.S. profitability also beings to deteriorate,” he said.
Morgan Stanley has also consistently warned that Europe’s sales recovery was based on stony ground.
Quality of growth, pricing
“We see recovery in Germany, Italy and Spain, but we are still worried about the quality of that growth and pricing,” said Morgan Stanley analyst Harald Hendrikse.
“We remain cautious about the potential size of recovery in Europe, given the lack of improvement in French and Italian economic and unemployment data. We continue to believe most of the European growth is lower-margin, lower-priced rental, fleet and self-registration activity, suggesting profit leverage will be less than expected,” Hendrikse said.
According to IHS Automotive, German growth had underpinned growth so far, but this also relied on an “ultra-competitive discount and incentives landscape in the market”. Latest evidence showed an economic slowdown may be about to occur.
“For the full year IHS Automotive sees sales rising by 3.6 per cent to 3.13 million, indicating a slowdown in the last five months of the year.”
End in sight
Meanwhile in mid-August, Germany published its latest GDP figures showing 0.4 per cent growth between the first and second quarters.
“The fact that low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth,” ING-DiBa economist Carsten Brzeski told the Financial Times.
“Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case,” Brzeski said.