Global Autos Update: Europe Turns A Corner, Not So The BRICs

As we near the end of 2013 we have a better idea of what shape the world's major passenger car markets will be in heading into 2014. Regional trends point toward the beginning of a modest recovery in Europe and sustained strength in North America, while we have become increasingly bearish on Brazil and Russia among the BRIC states. Elsewhere within that grouping, we expect China's economic rebalancing to act in favour of passenger car sales over our five-year forecast period.

Consumer Sentiment Improves In Japan

October marked a second consecutive month of positive sales growth in the Japanese car segment, after September ended a negative streak reaching back to April 2013. BMI believes a number of factors are at play, which should support positive sales into Q114, not least the increase in consumption tax planned for April 2014, which should see consumers bring forward their purchasing decisions.

Stabilisation Ahead
Japanese Passenger Car Sales (CBUs) And Sales Growth (% chg y-o-y)

As we near the end of 2013 we have a better idea of what shape the world's major passenger car markets will be in heading into 2014. Regional trends point toward the beginning of a modest recovery in Europe and sustained strength in North America, while we have become increasingly bearish on Brazil and Russia among the BRIC states. Elsewhere within that grouping, we expect China's economic rebalancing to act in favour of passenger car sales over our five-year forecast period.

Passenger Car Sales October 2013 (CBUs)
Last Month Monthly Sales % chg y-o-y YTD Sales % chg y-o-y BMI End-2013 Sales BMI Full-year Growth Forecast (2013, % chg y-o-y)
Core Europe October 760,371 3.4 7,628,214 -2.1 8,800,858 -3.3
Eastern Europe October 69,467 10.9 617,882 -1.4 729,377 -3.0
Japan October 354,497 18.4 3,824,475 -2.5 4,686,640 2.5
United States October 580,258 6.6 6,550,014 5.6 7,896,210 6.5
Canada October 64,168 4.7 663,916 1.1 763,594 0.5
Brazil October 239,590 -4.4 2,280,759 -3.0 2,865,798 0.5
India* October 239,137 -3.1 1,438,015 -4.9 2,601,426 -3.0
China October 1,605,700 23.6 14,454,657 15.0 17,199,672 11.0
Turkey October 46,985 8.2 499,339 18.0 634,159 14.0
Russia ** October 246,895 -4.9 2,046,502 -7.1 2,644,637 -4.9

Consumer Sentiment Improves In Japan

October marked a second consecutive month of positive sales growth in the Japanese car segment, after September ended a negative streak reaching back to April 2013. BMI believes a number of factors are at play, which should support positive sales into Q114, not least the increase in consumption tax planned for April 2014, which should see consumers bring forward their purchasing decisions.

Sales were up 18.4% year-on-year (y-o-y) in October, to 354,497 units, which bolstered the 10-month total to 3.82mn units. While this is a 2.5% decline y-o-y, we have a slightly more positive view for full-year sales than earlier in the year as reports filter through of consumers returning to dealerships. We now forecast positive sales growth of 2.5% for 2013.

Another development, which would also provide a boost to car sales in the short term, is the recent decision by Prime Minister Shinzo Abe to raise the consumption tax from 5% to 8% in April 2014. We now expect to see buyers front-loading their car purchases for the rest of 2013 and Q114.

Stabilisation Ahead
Japanese Passenger Car Sales (CBUs) And Sales Growth (% chg y-o-y)

Besides the improvement in consumer sentiment, the outlook among firms has also become more favourable. The Bank of Japan Tankan survey in September 2013 shows confidence among large Japanese manufacturers rising to its highest level since 2007. Furthermore, Abe has pledged a JPY5trn (US$51bn) stimulus programme to help firms mitigate the effects of the impending sales tax hike. One of the ideas being mooted is a corporate tax cut, which we believe will be beneficial in accelerating capital expenditure plans for firms. This could then increase hiring and wages, further boosting consumption.

After the initial boost to car sales in Q114, it is likely that sales will stabilise or even tail off for the rest of 2014. However, we believe it is still early to predict the consumer fallout from the hike in the consumption tax and we are waiting for more economic data.

Promising Signs For Europe

The picture in several European markets appears to be improving as sales for both our Core Europe and Eastern Europe country groupings achieved positive growth in October. Sales in all but one of the Core Europe markets were higher y-o-y, with a Spanish resurgence in particular contributing to combined y-o-y growth of 3.4% for the month.

Spain was the clear outperformer in October, with passenger car sales growth of 34.4% y-o-y. This follows a 28.5% y-o-y increase in September, and brings the market into positive territory over the year to date, with sales up 1.1% y-o-y in 10M13, to 606,736 units. BMI believes that this recent market surge comes on the back of low base effects from September and October 2012, coupled with the recent extension of the vehicle scrappage scheme buoying sentiment, as well as pent-up demand from previous sustained declines. A further boost for the sector should come from low base effects in the beginning of 2014, as the Spanish market was particularly weak in Q113.

Italy is still Western Europe's underperformer, although October's decline of 5.6% y-o-y was not as bad as previous months. Economic indicators suggest that consumer sentiment is beginning to turn a corner, in line with the moderation in declining autos sales, but we caution that the recovery will be slow and we expect private consumption to remain weak over the short-term. BMI maintains a bearish view on the country's private consumption story, and we maintain our forecast for an 8% decline in 2013.

In 2014, we expect total private consumption to post a modest recovery, but much of this is down to low base effects from several years of decline. As such, we expect many households to remain reticent about big ticket purchases, and BMI believes that a recovery in the passenger car market will remain some time behind. Accordingly, we forecast a 5.3% contraction over the year.

Sales in the Eastern Europe markets were 10.9% y-o-y higher in October, with several key markets posting double-digit growth y-o-y. Slovakia was the outperformer with sales up by 37.6% y-o-y, while Bulgaria showed a much needed increase of 11.6% y-o-y. For 10M13, Estonia continues to buoy the region's growth with sales up 14.7% y-o-y for the period. Growth in this segment over the year to date has been driven by pent-up demand in the market and some modest improvements in broader consumer sentiment. We forecast 18% growth in this segment over the year.

In 2014, we expect to see more sustained, albeit moderate, growth in Eastern Europe. In many markets, sales volumes remain far below their pre-global financial crisis peak, and we expect this to remain the case for some time to come.

Hitting A BRIC Wall

We have become increasingly bearish on the consumer story in both Brazil and Russia, which is impacting passenger car sales. Data shows that consumer confidence in Brazil has fallen sharply recently, and high inflation and weak credit growth is increasingly impacting consumer spending. This was reflected in a 4.4% y-o-y decline in car sales in October.

We expect the market to pick up somewhat over the remainder of the year due to lower base effects. However, the broader slowdown in consumer spending in Brazil looks to be impacting the passenger car segment more than we had previously anticipated. Accordingly, we are revising our 2013 sales forecast to a 2.0% drop, from our previous forecast of a 0.5% increase.

In Russia, the country's weak consumer story is increasingly impacting the segment, as the 4.9% y-o-y decline in October's passenger car sales suggests. Accordingly, we now forecast a 6.5% decline in the passenger car segment, down from a 5% drop previously. The potential implementation of the car loan subsidy programme later this year may serve to boost sales somewhat, but we expect this to have a limited impact in volume terms.

China Regaining Ground
Passenger Car Sales Growth (% chg y-o-y)

The outlook is better in China, where passenger vehicle sales are enjoying a period of sustained growth. With the stabilisation of the Chinese economy in Q313, consumer sentiment remains strong, while continued sales momentum for Japanese automakers bouncing back from the effects of the Sino-Japanese dispute points to strong growth for the rest of 2013.

As a result, our sector slowdown view has been pushed back to 2014. As the current stimulus driven economic growth gives way in 2014, vehicle demand will undoubtedly take a hit. However, we are of the view that passenger car sales will still hold up reasonably well despite slowing economic growth. Although a slower pace of growth will hurt consumer sentiment, the painful but necessary rebalancing of the economy towards private consumption will offset the overall slowdown.

The Indian passenger segment continues to face challenges, however, reflected in a 3.1% y-o-y decline in October, although this is an improvement on previous months. We acknowledge that car sales could see some respite in Q413 due to the monsoon, which has boosted rural incomes, coupled with festive season sales. However, we remain convinced that fundamental demand remains weak. Indeed, we believe that a real recovery will only take place in Q114 at the earliest . The 25 basis point hike in the benchmark repo rate by the Reserve Bank of India (RBI) on September 20 will likely continue to deter buyers from making a purchase due to higher borrowing costs. However, our Country Risk team believes that India's ongoing external balancing will pave the way for the RBI to begin easing in early 2014, which would then see consumer sentiment getting a boost.

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