Auto sector rebound set to decelerate - Capital Economics
Global Economics

Auto sector rebound set to decelerate

Global Economics Update
Written by Gabriella Dickens

While the auto sector was hit particularly hard by the virus lockdowns, sales and production now seem to be recovering. In the near term, this bodes well for economies which rely heavily on vehicle production including Germany, Japan and Czechia. However, we think that the recovery will run out of steam and car sales will remain below pre-virus levels over our forecast horizon.

  • While the auto sector was hit particularly hard by the virus lockdowns, sales and production now seem to be recovering. In the near term, this bodes well for economies which rely heavily on vehicle production including Germany, Japan and Czechia. However, we think that the recovery will run out of steam and car sales will remain below pre-virus levels over our forecast horizon.
  • As virus-related lockdowns closed factories and showrooms, COVID-19 has taken its toll on the autos sector with both sales and production plummeting around the globe. At the height of the lockdowns, car sales dropped in the US, euro-zone, Japan and UK combined by 54% between February and April, leaving the number of cars sold at its lowest since our series began in 2005. (See Chart 1.) Meanwhile, production of autos fell by 66% over the same period, with the UK faring particularly badly. (See Chart 2.)
  • Our calculations suggest that the collapse has been broad-based with sales in both the advanced and emerging world down by over 50% at their trough compared to February. (See Chart 3.) That said, some countries have fared worse than others. For example, South Korea saw sales down by just 14% at their trough, while France and Bulgaria experienced declines of over 90%.
  • While the sector has always tended to exhibit strong cyclical swings, the physical nature of the production and purchase of cars has meant that they have suffered even more than usual relative to other parts of the economy where working and shopping from home are possible. In the US, for instance, retail sales fell by 20.1% in March and April – much smaller than the 46% decline in auto sales in the same two months. (See Chart 4.) Equally, the decline in auto production has been larger than the overall decline in manufacturing output. (See Chart 5.) Since Central and Eastern European countries as well as Germany and Mexico rely most heavily on the auto sector, their economies will have suffered most from given falls in demand and production. (See Chart 6.)
  • With lockdowns easing car sales have started to rebound, but they are still below pre-virus levels in most economies. China is the key exception. But the broader recovery there has outpaced other major economies and we doubt that the sharp rise will occur elsewhere. Indeed, data from the US showed that while car sales had risen by a combined 47.4% in May and June, they were still 22% below pre-virus levels. (See Chart 7.) Production data tend to be less timely, but data from the US for June also showed a modest rise.
  • On the face of it, the pick-up in the autos sector could mark the start of a trend as consumers try to avoid public transport amid fears over the virus. But on top of the ongoing shift towards greener forms of transport, there are several reasons why this is unlikely to be the case.
  • First, it is likely that most of the rise in car sales reflects consumers making purchases that would have occurred during the respective lockdowns. Once these delayed purchases are made, we expect there to be a drop back. Second, the shift towards working from home will probably at least partially offset any rise in demand due to avoidance of public transport. After all, the car is the most popular method of commuting in most major economies. In the UK, for instance, around 67% of workers use their cars to travel to work.
  • Third, elevated unemployment should keep demand subdued in the next year or so, particularly given the discretionary nature of car sales. In the US, our expectation that unemployment will remain above its pre-crisis rate over the next two years is consistent with relatively depressed car sales of around 1.4m per month. (See Chart 8.)
  • The upshot is that we expect sales to settle below pre-virus levels over the coming months. But leaders in electric vehicle production, such as China, are better placed than most. And economies specialising in car production are likely to fare better than those which depend on tourism and consumer services.

Chart 1: US, Big 4 EZ, Japan & UK Car Sales
(Vol. Mn, SA)

Chart 2: US, EZ, Japan & UK Car Production (% m/m)

Chart 3: Car Sales Volumes
(% diff. between Feb. & Apr.)*

Chart 4: Retail Sales & Car Sales Volumes
(% diff. between Feb. & Apr.)

Chart 5: Total Industrial and Autos Production
(% diff. between Feb. & Apr)

Chart 6: Auto Sector GVA (% of Total GVA)

Chart 7: US Car Sales (Volumes, SA.)

Chart 8: US Unemployment vs. Car Sales

 *Note: Emerging Market Region Excludes China

Sources: Refinitiv, Capital Economics


Gabriella Dickens, Assistant Economist, gabriella.dickens@capitaleconomics.com