Europe is Already Rolling Over
The Association of European Automobile Manufacturers just reported that new car registrations (a proxy for auto sales) are up 6% over last year. Echoing that report, Ford just announced that 3rd quarter unit sales in Europe jumped 6%. After six years of contraction, European car registrations clocked their 13th month of growth.
Sounds great, until you look closely.
It’s a 1.2M unit market. 6% growth is 70,000 vehicles and getting there took a lot of incentives. Of the 70K in extra cars, 20%+ were in Spain (the highest performing market with a 26% jump in sales). Borrowing an idea from the US, the Spanish government introduced a cash-for-clunkers scheme which is turbo-charging sales (Spain is one of Europe’s major auto producing centers). As for the rest of the jump in sales, producers are offering ever-higher discounts; an average 12% (14% in France!) versus 8% last year.
Plus, the pace of registrations is slowing. It was up 13% year-over-year in March. Now it’s half of that.
In reality, European auto sales are bouncing along the bottom. The market has shrunk every year until this year, tumbling from ~16M in 2007 to 12.3M today.
Europe’s auto market is simply a microcosm of the entire EU economy. Many look at the recent growth in the auto industry as a sign that things are improving and can only get better. Unfortunately that is not the case. Europe is sliding into a recession
Stagnating Now, Rolling Over Tomorrow
The EU economy is more manufacturing-driven than the US (US GDP is 80% service vs. 67% for the EU).
Tracking goods shipments to predict the economy makes more sense for the EU, and not just any shipments. The SouthBay Index tracks a specific subset of shipping that is particularly sensitive to shifts in the economic winds. It reflects those changes quickly and early.
At the moment, the the SouthBay EU Shipping Index shows contraction has begun. This will be reflected in the broader economy by the 1st quarter of 2015.
Cheaper Euro, Stronger Dollar
Looking again at autos as a proxy for broader economics, at the recent Paris Auto Show, the President of Renault reiterated the desirability of more stimulus. Or, as Peugeot’s President Carlos Tavares pointedly said, “The weaker the euro will be, the more profitable we can be.”
A stronger dollar is actually a mixed bag for the US stock markets. It reduces US exports and cuts the value of European profits. Most big US companies are vulnerable and would see a hit to profits.
At the same time, a stronger dollar brings the good kind of deflation. Cheaper imports expand US consumer discretionary income. Restaurant chains would be the big winners here, especially ones concentrated in North America because they get the benefits of lower food costs without the risk of overseas sales exposure.
Are Central Banks Already Coordinating Their Moves?
With regional economies slowing again, Central Banks must surely be thinking stimulus, but are they going to take unilateral action or will they coordinate? Consider the following:
- Japan’s (-6.8%) GDP and an export sector that has yet to enjoy the benefits of a weak yen
- EU is suffering from Russia/Ukarine sanctions at a time when things are slowing down (latest PMI is 52.8)
- China PMI is barely above 50
The temptation must be strong to cut rates or to take further action. Is another round of currency skirmishes about to take place?
Strong Dollar and Low Yields
Overt moves may not be necessary.
Supply is tapering and driving down rates due to bond scarcity. Demand is rising as the relative strength of the US is driving up treasury demand (the “cleanest shirt syndrome”). The dollar has been firming up and there’s more to come. The yen at 120 and a Euro at 1.20 is inevitable within a year.
As you may know by now, Moneyball Economics doesn’t just take the global economy at its surface. When you really delve in and listen to what the data is telling you, it’s clear that the European Union has punched their ticket to Recession. Knowing what that means to the rest of the world could make a huge difference to your own bottom line.