As the global economy faces its sharpest slowdown since the financial crisis, one industry is both culprit and victim.
The motor industry affects the health of the global economy far more than its share of total output would suggest: carmakers have long supply chains to source parts; they are also big consumers of raw materials and chemicals, textiles and electronics; and their fortunes affect millions of service sector jobs in sales, repairs and maintenance.
Last year the sector shrank for the first time since the global crisis. The IMF believes this fall in output accounted for more than a quarter of the slowdown in the global economy between 2017 and 2018.
The sector may also be responsible for up to a third of the slowdown in global trade growth between 2017 and 2018, the fund said last month, after factoring in the spillover effects on trade in car parts and other intermediate goods.
“The car sector has been weighing heavily on manufacturing activity and growth,” Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department, said last month.
The IMF’s forecast of a modest pick-up in global trade in 2020 hinges on a recovery in the sector. But its analysis also underscored the potential for further damage if the sector becomes the next casualty of the escalating trade spat between the US and EU; the White House is due to decide by November 13 whether to impose a 25 per cent tariff on auto imports.
Some motor industry executives already blame US trade policy for much of the sector’s misfortune, in particular for a sharp downturn in the Chinese market that had driven global sales growth.
“This trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy,” Herbert Diess, Volkswagen’s chief executive, said at the Frankfurt motor show in September, adding: “Because of the trade war, the car market [in China] is basically in a recession . . . That’s scary for us.”
But while carmakers are suffering like other manufacturers from the broader uncertainty over trade policy, they have not yet become a direct target of US trade policy.
Instead, the IMF said the industry downturn was mainly due to policy changes in China — including the withdrawal of tax breaks encouraging car ownership and a clampdown on peer-to-peer lending — and the disruption caused by the rollout of new emissions tests in Europe.
The IMF noted that in many countries, consumers were holding off on purchases because standards were changing rapidly, while the options for car-sharing were evolving.
Meanwhile Indian car sales have slumped because of problems in the shadow banking sector that provides around half of new car finance; while recession in Turkey and Brexit-related uncertainty in the UK have held back sales in other big markets.
Overall, car sales fell by about 3 per cent in 2018 and car production by around 2.4 per cent, after correcting for differences in the average price of cars between countries, the IMF said.
Research published by Fitch Ratings earlier this year argued that this global fall in car sales could have reduced world gross domestic product by as much as 0.2 per cent — significantly more than the IMF estimates — after taking account of spillovers to other industries and the effects of lower wages and profits on household and business spending.
“This is where the global slowdown has been concentrated,” said Brian Coulton, chief economist at Fitch Ratings. “It has been the lead sector, not just broader collateral damage [of the trade war] . . . There is no doubt this is a key driver of the global manufacturing cycle.”
Matters will worsen if the car industry does fall victim to tit-for-tat tariffs. With supply chains criss-crossing borders, and just-in-time manufacturing processes, the industry is especially vulnerable to new trade barriers.
Wilbur Ross, US commerce secretary, hinted in an interview with the Financial Times last month that Washington was inclined to pursue talks with the EU, rather than imposing tariffs on auto imports when a six-month reprieve runs out in the middle of this month.
Yet the threat of tariffs remains live. Analysis published earlier this year by the Peterson Institute for International Economics found that if the US were to act on the threat, imposing a 25 per cent tariff on auto imports from all countries, US auto production would fall by 1.5 per cent, with the sector shedding almost 2 per cent of its workforce and 195,000 workers becoming unemployed nationally as a result of the macroeconomic shock.
If other countries retaliated, US production would fall 3 per cent, with 624,000 US jobs lost and 5 per cent of the sector’s workforce displaced.
“If they do this, we are all losers,” Oliver Zipse, BMW’s chief executive, told a conference last month, adding that tariffs would threaten jobs and production at its factory in South Carolina.
So far, the US is the only big market where car sales have remained relatively resilient. Much of the downturn elsewhere appears to be cyclical: the decline followed several years of surging sales, and it came just as many carmakers were being forced to make large investments to develop electric vehicles that will be lossmaking in the near term at least.
But pervasive uncertainty over trade — and the resulting worries over global growth — do not help.
As Holger Schmieding, an economist at Berenberg, pointed out, this kind of uncertainty tends to scare consumers off big ticket purchases: “If you are uncertain . . . you don’t have to buy the car.”
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