"The automotive sector improves its outlook though not without risks"

Juan Ramón García, BBVA Research Economist, was at the recent Automobile Insurance Conference of the ICEA, which was sponsored by GT Motive, explaining the keys and prospects of the automotive industry in 2014.

Juan Ramón García - Current context and prospects for the Spanish economy

Juan Ramón García's speech was titled "Current context and prospects for the Spanish economy: a look at the automotive industry".

In his speech he talked about the prospects and keys of the automotive industry in Spain in 2014, which can be summarised in:

The world economy has reached a balance point in its growth.
The Spanish economy bottomed out in 2013 and will see new growth in 2014.
Private consumption will go from less to more... although it won't reach levels of triumphalism.
Government plans to provide aid to renew the country's vehicle fleet will stave off a decline in registrations this year... Even without this aid, enhancing the foundations of vehicle demand in 2014 could result in a pleasant surprise or two.

Automotive: scrapping plans influence sales trends

Car dealer

Cars are consumer durables and the indicators that BBVA Research work with show that these durables could have now bottomed out, especially after the "debacle" of the last quarter of 2012 and first quarter of 2013, brought on by the VAT hike and the elimination of bonus salaries for civil servants.

Indeed, the news – the headline in the case of durable goods in the Spanish economy – is that external demand is headed in the same direction as domestic demand. Exports of durable goods have regained the dynamism they lost in the second half of 2012... and the car, that symbol, is doing reasonably well.

Spurred by government aid to fleet renewal, the scrapping of vehicles is having an effect on car sales. The first half of 2013 saw an increase in demand both from vehicle fleets and, more importantly, from private individuals taking advantage of the Efficient Vehicle Incentive Programme ("PIVE"). In the third quarter, however, the PIVE lost steam and the professional channel withdrew despite the introduction of the Air Quality Programme ("PIMA Aire"). What is going to happen in the last quarter of the year? García notes that it has got off to a promising start and that the renewal of the PIVE heralds a positive outcome.

One of the most interesting analyses conducted by BBVA Research relates the effects of the PIVE with the VAT hike in the car market. Since the PIVE came into force in October 2012, 786,000 vehicles have been registered up to October 2013. If the programme had not been approved, there would have been just 605,000. So the effect of these scrapping subsidies amounts to more than 181,000 vehicles. BBVA Research has also calculated that if VAT had not been increased during this period we would be talking about 842,000 registrations for the same period, i.e. the tax hike resulted in 237,000 less registrations.

Another interesting point that Juan Ramón García made was what the PIVE programme has failed to do: There has not been a relative reduction in vehicle prices during 2013. Nor has it rejuvenated the vehicle fleet, since the percentage of cars on the road over 10 years old has increased by almost 9 percentage points since March 2012 to 53.3% of the fleet. It has also failed to reduce the ratio of used car sales to new car sales (used car sales increased 5% over the year and in the first half of 2013, the ratio of used car sales to new car sales was 2:1, compared to 1:9 a year ago).

What is going to happen to the automotive sector in 2013?

The extensions to the PIVE will stave off a decline in vehicle registrations and we will close 2013 with sales of around 710,000 units. An improvement in the foundations of demand in 2014 (GDP growth, unemployment and relative fuel prices) would offset the effect of the disappearance of the PIVE, were this to occur. Hence, in this scenario of economic improvement and the PIVE programme, there would be a potential demand in the region of 990,000 vehicles.

An improving global economy

Economy graphics

From the general to the specific. And there is reason for excitement: "We have an optimistic view because the outlook is improving. We are immersed in a context of improvement, though not without risks", he said at the start of his speech.

Global growth is starting to rebalance itself. In contrast to this time last year, the developed economies are improving due to the efforts of the European and Japanese central banks, while some emerging economies are witnessing a more sluggish growth, especially in Asia.

Europe is seeing greater stability as a result of fiscal policies and the moderation of risk events that could have knocked us off track, like the Cyprus bailout, the absence of a government for a few weeks in Italy or the lack of agreement on the debt ceiling in the United States.

In Asia, the slowdown in economic growth is linked to the weakness of domestic demand in its emerging countries and the announcement – though it did not ultimately materialise – of the withdrawal of the United States Federal Reserve economic stimulus. The mere announcement of the imminent reduction in the rate of financial asset purchases generated tensions in the markets. The postponement of this withdrawal has slowed the outflow of capital and improved expectations.

Hence, for BBVA Research, the global economic environment is that of "a positive scenario though not without risks". So what are these risks? There are three: the Federal Reserve's messy withdrawal of its stimulus policy or the failure to reach an agreement on the debt ceiling in the United States, which could increase rates and risk aversion in the markets; economic adjustments in China and other emerging countries, and a possible euro crisis due to lack of progress in banking union or risks associated with the bailout programmes of rescued economies.

What about the Spanish economy?

Traffic jam at sunset

It is returning to growth, albeit at moderate rates. For Juan Ramón García's team, the Spanish economy bottomed out in 2013. And in his view, the commitment to structural reform will be key to consolidating the improvement in the markets and increasing the potential growth. If this is the case, Spain would be following a classic recovery pattern. Exports improve first, followed by business margins and then investment in machinery and equipment, credit is reactivated as a result of all this, which leads to GDP (Gross Domestic Product) growth. With nearly six million unemployed people in Spain, there was one question in the minds of the public: And what about jobs? Juan Ramón García's answer was categorical: companies only start hiring at a decent rate once they begin to see consolidated recovery.

BBVA Research has also noted some important effects of the crisis on the adaptability and development of the Spanish economy.

The first is a significant surplus in the current account, resulting from increased exports and reduced imports. Exports have grown over the past year despite the recession in the eurozone... largely as a result of gains in competitiveness due to both price and quality. And unlike what happened in the 1990-1993 crisis, this time Spain was unable to resort to devaluing the currency. For the first time in twenty years, Spanish products have recorded gains in competitiveness over imported goods, mainly on price. What is more, Spanish businesses and consumers are prioritising products made here. So, besides the increased growth in exports due to this new-found competitiveness, imports are also witnessing a decline, 42% of which can be explained by this repositioning of domestic products.

The second of these effects is more dynamic investment. Wage moderation and productivity gains supported by a decline in uncertainty should improve the flow of new credit operations.

In matters of "fiscal consolidation", BBVA Research forecasts that less short-term effort will be needed. Major tax efforts were made in 2012 and 2013, which allowed public deficit to remain at around 6.8% of GDP. Deficit targets more consistent with recovery will encourage GDP growth in 2014.

In conclusion, according to Juan Ramón García, the Spanish economy will bottom out in 2013 with a fall in GDP of 1.3%, before beginning to grow again in 2014 by 0.9%. But... how can we promote a more dynamic economy? Relatively negative scenarios such as those forecasted by the International Monetary Fund (IMF), which sees no growth anywhere, would involve the loss of more than a decade... three decades to get employment levels back to pre-crisis levels at an annual growth rate of 0.9%. To avoid such a scenario, BBVA Research believes that reforms are necessary to further the potential growth of the economy. Otherwise, they warn, the unemployment rate will remain high and recovery will be slow.

With regard to the consumption of Spanish households, the figure for 2013 was distorted by the VAT hike, but 2014 appears promising.

Our speaker sees a clear link between employment and consumption. The reform of the labour market has allowed a rebalancing between the adjustment in quantities (employment) and prices (wages), although it will not prevent the continued decline in the number of employees in the short term. This means that sustained job recovery will not come until the second half of next year. According to Juan Ramón García, the loss of a million jobs could have been prevented by more appropriate labour institutions at the onset of the crisis.

García explained that the VAT increase has changed consumption patterns in Spanish households and is having permanent effects on their spending. In other words, the deterioration of the labour market combined with tax consolidation has led to a fall in real disposable income.

But we need to remain optimistic. Because the BBVA Research economist himself is. Moderate but reasonably so. The Spanish economy bottomed out in 2013. We will see growth in 2014. And the foundations of the economy suggest developments in the automotive market, even without the PIVE programme.

Back


 

 GT Motive - About us

Search

What's new