BMW…Audi…Range Rover…Mercedes…

We aren’t just naming car brands. These were most of the brands we saw as we parked our car in a public garage.

Buying a car is one of the biggest purchases people make, apart from property.

We have written much about what happens to home prices when credit tightens and the economy takes a turn for the worst. But we haven’t said much about another major loser from the down fall in 2008: the car industry.

One of the things that we really noticed when we first moved to Australia was the amount of flash new cars on the streets.

When credit is free flowing and things are good, people get homes…and car loans.

Back in Spain, the pre-crisis period was great for vehicles.

It all changed once home prices dropped and credit tightened. Car makers saw a big drop in sales.

The same happened in the US.

From Kellogg Insight (emphasis mine):

‘In the wake of the global financial crisis in 2008, Americans stopped buying new cars.

‘Not completely, of course: annual new car sales decreased by an order of magnitude, from about 16 million in 2005 to less than 10 million. But this drop in sales—coinciding with General Motors and Chrysler filing for bankruptcy and receiving bailouts from the U.S. government—was sharp enough to draw the attention of economists like Efraim Benmelech of the Kellogg School of Management.

‘Sales of durable goods like home appliances, personal electronics, and automobiles tend to decline during a recession for intuitively obvious reasons: “Many households lost money and equity so they couldn’t afford to buy new cars,” Benmelech says. But he wondered if mere belt-tightening by consumers was enough to explain why the market for new cars contracted so dramatically in the immediate aftermath of the economic crisis.

‘In research conducted with Ralf R. Meisenzahl and Rodney Ramcharan of the U.S. Federal Reserve Board, Benmelech identifies an additional cause of the contraction in car sales: a sudden freeze in the credit markets that normally allowed auto manufacturers to offer financing loans and leases to their customers through their network of dealers. When this “shadow banking system”—which included GMAC, the lending arm of General Motors—seized up, automakers found themselves in a peculiar bind.’

In Spain we saw a big drop in car prices after the crisis, as sales plummeted.

 

Car makers are in trouble

Today, fuel is low, and employment figures are high. Yet car makers are once again in trouble.

Germany has seen their industrial productivity fall unexpectedly.

The German car industry is struggling, in particular with the effects of the trade war and a tightening in European vehicle emission standards. Word on the mainstream is that the slump is temporary, and automakers will see a quick recovery.

But, we don’t think their troubles are over.

Germany is the world’s largest auto exporter. According to Germany Trade and Invest, Germany exported over three quarters (78%) of the cars it manufactured in 2017.  Their biggest export markets: UK, US and China.

Now, the trade war is definitely having an impact on this. Car sales are collapsing in China.

From Bloomberg:

‘The growth engine for the world’s car industry has been thrown into reverse, with China recording the first annual slump in auto sales in more than two decades — though progress in trade talks with the U.S. and planned government incentives offer a ray of optimism.

‘Sales in the world’s biggest market fell 6 percent to 22.7 million units last year, the China Passenger Car Association said Wednesday. The trade war and a slump in Chinese stocks have put off buyers in an industry where warning lights are already flashing worldwide. […] Manufacturers that spent billions of dollars adding plants and production lines in China in the past decades are uncertain if and when growth will return.’

But, we don’t think that’s the only problem car makers have.

Housing prices and credit

As we have written before, confidence is everything in our system.

And, two factors can really shake consumer confidence: housing prices and credit.

House prices are falling around the world. We are seeing prices dropping in major markets like Manhattan, UK, Canada, Hong Kong and even here in Australia.

At the same time, credit is also tightening.

Falling home prices and the end of easy credit will affect confidence.

As households see their home values decline, the wealth effect goes negative. That is, they feel they have less wealth, so they spend less.

In Australia, we are already seeing some effects. Car sales have dropped by 3% in 2018. From The Australian Financial Review:

‘A car is one of the most expensive purchases a person will make. Consumers’ willingness to shell out for new wheels provides insight into confidence about the state of the economy, employment and housing affordability.

‘Dropping home values, a rocky sharemarket and credit tightening gave Australian consumers the jitters in 2018, according to CommSec.

‘Consumers across the globe have been given the spooks by an impending tariff war between US and China, diminished economic activity and tumbling sharemarkets, according to CommSec.’

The trade war, but also falling house prices, tighter credit and lower consumer sentiment could spell trouble for car makers.

Best,

Selva Freigedo