Germany, Russia and Turkey to drive the recovery in Europe

Such was the forecast of David Teolis, Manager, European Economic and Industry Forecasting for General Motors when he addressed the J.D. Power Global Automotive Outlook Spring Conference in London.

Teolis began by outlining the key economic issues influencing the Western European automotive market. The region’s economic development is multi-speed, and inflationary pressures have increased speculation regarding potential shifts in monetary policy. The  price of oil remains a key risk given developments in North Africa and the Middle East. Fiscal consolidation, high unemployment and tighter credit conditions are expected to contribute to below-trend growth in the region.

In Central Europe, the global recovery, improving credit conditions and pent-up demand, partly offset by fiscal austerity measures in some markets, are expected to be major contributors to the economic outlook. In this region, Turkey and Poland are leading the recovery with Romania lagging.

Eastern Europe and Russia sees the post-crisis recovery becoming broad-based but modest. Once again, the global recovery, rising resource demand and the easing of credit conditions are providing underlying support. The region is benefiting from declining unemployment, credit expansion and rising oil prices, although rising food prices are contributing to above-target inflation.

The fiscal situation is more severe among the Western European economies of the European Union. The exception is Germany, where the fiscal position is largely favourable. While not part of the EU27, Russia and Turkey have a lower debt burden than most of the Western European economies whilst Greece, the UK, Spain and Ireland have the highest government deficits as a percentage of GDP. Total European real GDP is expected to grow by 1.9% in 2011 and by 2.1% in 2012 and the recovery in Central and Eastern Europe is predicted to outpace that of Western Europe.

New vehicle sales in Europe declined by 19% between 2007 and 2009 and Teolis does not expect a return to the pre-crisis peak before 2017. Looking at individual markets, Germany is in a favourable position to respond to unexpected shocks. It enjoys high consumer confidence, low unemployment, a favourable fiscal situation and a high industry order bank. The downside risks are an over-reliance on exports, rising fuel prices, a high savings rate, declining population and the risk that expected European Central Bank rate increases are premature. Despite recent volatility, the German vehicle market outlook is expected to be largely stable with sales expected to trend sideways.

A combination of cyclical and structural factors is contributing to the strong performance of the Turkish vehicle market. GDP is above the pre-crisis peak and Consumer Price Index inflation is at a four-decade low. There is rapid job growth and record-high vehicle-buying attitudes. To the extent that the projected rising working-age population can be absorbed into the economy, this may contribute to the significant upside potential of the vehicle market. The working-age share of the total population is projected to reach 69% by 2030, up 9% from 1990. Turkey’s population is expected to increase by nearly 15 million to 90 million people by 2030 – the second-highest in Europe. The Turkish vehicle market is historically volatile and, although an industry correction is not unlikely due to strong cyclical momentum, medium-term risk is biased towards the upside.

The Russian market suffers from unfavourable demographics. Despite having the largest population in Europe, it is expected to decline by some 11 million between 2010 and 2030, resulting in a cumulative decrease of more than 19 million people since 1990.

Significant excess capacity and labour market slack helped Russia to achieve rapid growth during the 2000s. Current conditions are less supportive to repeat such a pace of economic growth. Eastern Europe Concensus Forecasts has viewed Russia’s long-term outlook less favourably since the crisis and medium-to-long-term forecasts have been revised downwards by roughly 100 – 150 basis points.

Nevertheless, the Russian automotive industry is projected to surpass its 2008 pre-crisis peak in 2016 although, given the market’s potential for boom and bust, a significant risk range should be considered. It is still likely, however, that substantial pent-up demand may contribute to stronger-than-expected vehicle sales activity.

Vehicle Sales Forecasts by Major Market

Figures are in millions.

In summary, the Central and Eastern European markets are expected to gain an increasing share of the total European automotive industry. Germany will remain the leading market through 2016 by which time Russia will have exceeded its 2008 peak and will have become the second-largest market in Europe.

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