How the automotive sector is driving the global economy out of recession: Kohler

The global recession is over, and – would you believe it – the world is being led out of the darkness by none other than the car industry.

The automotive sectors of America, Europe and China are booming. Partly as a result of this: the US on Friday reported what is likely to be its last GDP decline – 1% for the second quarter. Europe’s second quarter GDP also looks likely to be the last negative.

In each case government subsidies aimed at lower carbon emissions are underpinning a boom in car sales. In Europe and the US they have had incredibly successful “cash for clunkers” or scrapping schemes, while in China, the government halved the tax on cars with engines smaller than 1.6 litres, which has resulted in a huge boom in sales of small cars in China.

According to a report published over the weekend by researchers at Canada’s Bank of Nova Scotia, global car sales were at an annual rate of 48 million units in June, up from 43 million in the early months of 2009.

The biggest boom, by far, is in China, where car sales have gone up 48%, year on year, to an annualised 7 million units. If trucks and buses are included, as they are in the US, China’s auto sales look like exceeding 10.5 million units this year – more than the United States for the first time.

China seems to be entering the usual time when everyone suddenly has to have a car – that is when real per capita income approaches $US4,000 per annum.

The economists at Scotia Economics say this is what happened in Korea in the mid-1980s, after which car sales surged by 30% a year for a full decade – nearly three times faster than income growth. Similar accelerations in car sales happened in Japan and Canada in the early 1970s and in the United States in the 1960s.

The top selling Chinese brand is General Motors, which sold 814,000 cars in China in the first half of 2009 – only 130,000 less than it sold in the US. GM plans to launch more than 30 new Chinese models over the next few years and expects to be selling two million units a year there by 2014.

Back in Detroit, GM is out of bankruptcy and cutting costs, as is Ford and Chrysler. According to Finbarr O’Neill, the head of marketing research firm JD Power, the industry is paring down to be profitable in a 10 million unit market. Since sales are likely to rebound to 15 million (he thinks) the car companies are going to make a lot of money.

Officially, US car sales were 17 million a year before the recession, but O’Neill says that was an illusion because manufacturers were dumping cars with rental companies. Genuine retail sales, he says, have been declining for a decade.

In any case the “cash for clunkers” program, as it’s called (officially Car Allowance Rebate Scheme – CARS), has directly resulted in more than 2 million sales. The program, which has now been extended with another $2 billion from Congress, offers a rebate of $US3,500 to $US4,500 if a car is traded in for another one that does 10 miles more to the gallon.

In Germany, the government pays a bonus of €2,500 to anyone who trades in a old car for a new one, which resulted in an immediate 30% increase in new car registrations.

There are similar schemes all over Europe: up to €5,000 in Italy depending on carbon emissions, interest free loans in Spain, also depending on emissions, and various schemes in France, Austria, Portugal, Romania, Cyprus, Slovakia and Netherlands. Britain also introduced a scheme, but mucked it up so it hasn’t worked very well.

However, all these schemes are scheduled to expire at the end of 2009, so with unemployment likely to be still rising then, vehicle sales may fall again next year after increasing this year.

But in the meantime, the car scrapping schemes have been taking the recession to the wrecking yard.

Morgan Stanley’s economics team reckons that car production could add as much as 6 percentage points to annualised third quarter GDP, which should ensure a positive GDP number for the quarter.

Something similar is happening in Europe, with both consumer spending (on cars) and industrial production rising strongly, so that Eurozone GDP is likely to be no worse than flat in the third quarter, after declining by an expected 0.7% in second.

This article first appeared on Business Spectator.