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UN climate change and the car economy

Germany still has a lot of adjusting to do as we move towards green vehicles. This will continue to impose a cost on its economy.

John Redwood

in Features


The latest German figures for the industrial outlook are bad. The PMI reading for September plunged to 41.4, well below the 50 level which is the balance point between growth and decline. It is the weakest reading for any of the major economies and implies a continuing recession in industrial output. The German services PMI is still in positive territory, though the composite of the two is now below 50. The wider Eurozone economy is still managing a little overall growth thanks to services and to less acute industrial decline in various countries.

With interest rates at zero and with the ECB embarking on another round of quantitative easing money policy is supportive. Germany has scope to spend more as the government is running a surplus. There is talk of beefed-up programmes of green infrastructure investment to come from both the German and EU governments. So why are the numbers so weak?

The dominance of the car industry in German output is a big part of the reason. The trade dispute and general economic slowdown worldwide are hitting exports. In China in particular, higher taxes on cars coupled with a worry about extravagant consumption has hit expensive foreign vehicles. At home in the Eurozone the big policy moves to do more to curb carbon dioxide emissions has had a damaging impact on new car sales, particularly of diesels. It is taking time and money to develop a range of electric cars that enough people wish to buy.

The international mood is more hostile to conspicuous consumption that is thought to be harmful to the planet. The German industry has specialised in expensive larger cars, and these are now being targeted by international organisations and by governments. The UN debates this week wish to see the world making more rapid progress to removing carbon dioxide emissions from human activity, with transport central to the pressures. At the UN Climate Summit Germany herself pledged to go carbon neutral by 2050 and to phase out coal. 76 other countries agreed to go carbon neutral and others like Italy and the Netherlands agreed to phase out coal.

Neither of these motor industry problems have an easy fix. Looser credit and lower interest rates may tempt a few more buyers with great offer car loans, but they do not reassure buyers about the future tax and regulatory landscape for diesel or petrol cars. Now people know governments are hostile to these products they are reluctant to buy them in the numbers they used to. Meanwhile as it takes time for the electric product to appeal, it also gives challenger companies outside Germany the chance to shine in the car market of the future.

The general industrial slowdown worldwide reflects an investment slowdown in manufacturing, mining and raw material processing more widely. This too hurts Germany with its accent on plant and machinery exports. German steel and chemicals are also adversely affected by the decline of motors and other engineered products which need materials from process industry. The German stock market has been going nowhere since 2015 as investors reappraise its weaknesses as well as its strengths. Germany, so far, has been on the wrong side of the digital transformation and the green revolution. The decision of the new EU to drive ahead with both of these transformations means Germany still has a lot of adjusting to do, which will continue to impose a cost on its economy.

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