Globally, the outlook for auto sales is similarly uneven, so much so that the future of some of the biggest players is open to debate. All eyes are on the US automakers General Motors, Ford Motor, and the Chrysler unit of DaimlerChrysler. GM and Ford are in the early stages of crucial multiyear turnaround plans, especially in their key North American markets, and Daimler appears intent on spinning off Chrysler rather than pursuing the synergistic strategy that led it to buy the U.S. car company in 1998. However, Detroit doesn't have a monopoly on problems. In Europe, for instance, both Peugeot S.A. and Renault S.A. face their own struggles to preserve market share and shore up profitability.
Overall, Standard & Poor's Ratings Services sees vehicle sales pretty much flat in the US and Europe, with the best hope for strong growth in Asia (see Chart 1). In the US, lower gasoline prices will likely offset higher interest rates in a slowing economy, with the net result of keeping unit volume just slightly below last year's 16.5 million vehicles. In Europe, the UK and Spanish markets will continue to see slight declines, while Germany and France could see some upside. However, further tightening by the European Central Bank should help slow down consumer durable sales.
That leaves Asia, with its booming Chinese and Indian economies, as the exception to this global rule. Demand for automobiles in emerging Asia is potentially large, with growth at an average annualised 7%. In addition, the region's expanding middle class is creating new demand for cars, helping to offset the slowdown in Japan and elsewhere.
Tough Road Ahead For The U.S. Auto Market
In recent months, US automobile sales have held up well, even for US manufacturers. However, the unexpectedly upbeat sales performance was more likely a short reprieve from what will likely be a sluggish year for the U.S. auto market.
US macroeconomic outlook
A nation's auto demand depends on the strength of its economy, so as long as the U.S. is doing well, people will be all-too-willing to buy new cars. Now in its sixth year of expansion, however, the U.S. economy is slowing, with annualized real GDP growth of just 2.2% in the fourth quarter of 2006. For 2007, we expect that real GDP growth will come in at a slower 2.4% but will still be enough to generate solid income gains. That lower rate, however, provides little cushion if oil prices spike or the housing and stock markets unravel more than expected. Nevertheless, except for housing, the economy has held up surprisingly well.
Despite the economic slowdown, consumer spending remains resilient, rising 4.2% in the fourth quarter of 2006, but first-quarter 2007 sales suggest some loss of steam. With employment and income growth healthy and stock-market gains helping to offset housing weakness, Americans can still pony up the money for a new car. The drop in the unemployment rate back to 4.5% in February and recent sharp upward revisions to payrolls strengthened household incomes. Moreover, the energy-related drop in inflation helped push real earnings into positive territory (up 1.5% over the last 12 months) to boost spending.
American consumers continue to live beyond their means. The saving rate was negative 1.2% in the fourth quarter of 2006 and averaged negative 1.1% for the year, the lowest since the Depression. For the first time since 1932-1933, the saving rate has now been negative for two consecutive years. Although the pace of borrowing has decelerated, average household debt hit yet another record: 137% of after-tax income in the fourth quarter of 2006. That burden will be a drag on future spending.
But spending more than they earn does not seem to bother most Americans, in part because household wealth is doing well. Most people measure savings by what they have in the bank today versus a year ago. By that standard, Americans are getting wealthier. The stock market recovery and higher home
prices boosted net worth last year. The ratio of net worth to income hit 575% at the end of 2006, not quite at its peak of 615% reached seven years earlier but a record for any time before 1997.
Low interest rates and strong house prices encouraged homeowners to tap their home equity for money to spend. Freddie Mac estimates that homeowners took more than $626 billion out of their homes' equity in 2006. Based on Federal Reserve survey data, we estimate that nearly half that money went into
consumption (including education). Now, however, higher interest rates and weaker home prices make this option less attractive. We expect home prices to fall 9% from their mid-2006 peak, damaging wealth and slowing growth in borrowing and spending but leading to a higher saving rate in 2008.
The authors of this article are:
David Wyss, Chief Economist, Standard & Poor's
Beth Ann Bovino, Senior Economist, Standard & Poor's
Jean-Michel Six, Chief European Economist, Standard & Poor's
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