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Will the struggling car industry help shift policy?

John Redwood, Charles Stanley’s Chief Global Economist, argues that policymakers worldwide need to look at the global auto sector to get guidance for good policy.

by
John Redwood

in Features

18.01.2019

It used to be said that what was bad for General Motors was bad for the whole US economy. Today, markets are more concerned about negative news from Apple or Amazon. The US domestic car makers struggle to prosper in a market hit by rapid technical and regulatory change – and substantial foreign competition.

This week, the main car producers have been lobbying hard to get a better deal from the US administration. They are telling the President that his tough trade talks and higher tariffs are damaging car sales and investment in new production, at the very time when President Trump wants to expand the US industry. The most recent scare put round was news that German car plants in the US had seen a 37% slump in their sales to China. Fortunately, this is a small part of a much bigger German export to China, accounting for only 95,000 vehicles out of around 5m in total. The overall hit to German sales into China has been much more modest. There is an effect from the general move towards electric vehicles and uncertainty over emission standards globally, as well as falling sales for a slowdown in credit and economic growth rates.

The US tariff of 25% on Chinese vehicles into the US has caused a delay in Chinese automaker GAC’s possible inward investment to the US. Tariffs on steel and aluminium imports are being blamed for price rises on US-produced vehicles. There is a general slowing in US demand as higher interest rates reduce people’s wish to commit to more car-loan debt. Meanwhile, demand for cars in Europe fell sharply towards the end of 2018. The slowdown in consumer spending, the monetary tightening, and big changes to car regulations have all combined to damage sales. The advent of new EU emissions regulations in September led to pre-emptive buying followed by months of decline in sales. Companies struggled to get approvals and persuade people to buy the new, higher-standard vehicles. In part, potential buyers of petrol and diesel vehicles were put off by the thought that the authorities were going to go further in their drive to move to all-electric vehicle fleets, possibly undermining future values of traditional vehicles. In Germany, car sales were down 6.7% in December 2018, rounding off a weak final quarter to the year. German industrial production fell in November, in part owing to a weak car sector. The UK market has been very weak, with higher Vehicle Excise Duties and a tougher regime for car loans adding to the EU regulatory issues shared with Germany.

The German car industry sees China as the fast growing main market for cars in the world. Chinese demand is now around 24 million vehicles a year compared to 17 million for the US and a similar volume for the EU. Where EU sales are fairly static, Chinese growth until recently has been good, and most forecasters expect growth to resume in the years ahead as more of China’s huge population become rich enough to afford a car of their own. With this in mind German manufacturers have signed agreements with China and Chinese companies, promising investment and agreeing to develop new technologies for automation and electric drive in China. China for her part sees German engineering as something to work with and emulate and has succeeded in attracting substantial technical and investment commitment from VW, BMW and Daimler (Mercedes). BMW will produce an all-electric iX3 in China, and Daimler is working with China’s Baidu on autonomous vehicles.

The Chinese trade figures spooked markets when they revealed that, in December, imports were down by 7.7% whilst exports fell by 4.4%. This was widely attributed to the trade war, but also reflects the weakness in the domestic Chinese economy. The authorities have been seeking to tighten monetary policy, cleaning up some of the excess lending of the past and requiring banks to improve their balance sheets. This process seems to have gone further and faster than the authorities wished as it has had a bigger impact on the real economy than they wanted. We are now seeing the government response. They are going to do more of the same on tax cuts and money relaxation. We have seen a recent loosening of money policy by allowing the banks to keep lower reserves for a given volume of spending. Earlier in May 2018 China announced some cuts in value-added tax and personal income tax. In December, there was a package of tax cuts for smaller enterprises. Now they have told us to expect more cuts for both consumers and small business. They will look at China’s very high social charges for pensions and healthcare as well as at VAT and income taxes. They will also encourage more local government bond issuance to finance construction projects.

All this is welcome news to equity markets wanting some reassurance that China will maintain a decent rate of growth. The government is steering people to expect 6%-6.5% growth again in 2019, but will need to do more to be able to deliver this, given the slowdown we are now seeing in the figures. This seems to be a suitable background for some flexibility by both China and the US in their trade talks. Neither side wants to fall into a recession, with both sides now accepting that the tariff war is unhelpful to growth. The US wants China to cut her car tariffs further. All have an interest in a bit more money and credit around to stimulate sales.

The car industry is still capable of warning of slowdown or recession and helping get a change of policy. This time, its warning may encourage some fiscal and monetary relaxation by authorities in China – and help the Fed to ease off its tightening. That may not be enough to solve all the problems of some of the leading car companies, however. They face bigger structural issues from technology, regulation and lifestyles.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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