Are we near the bottom of the industrial recession?
There has been a downturn in industrial activity in 2019, as structural changes in the car market have hit demand. Is this coming to an end?
This year has been a year of mixed fortunes. Industry has fallen away in many parts of the world, whilst consumer demand and services have kept most of the world out of recession. Equity markets have done well in anticipation of a recovery to come, despite poor company earnings performances in many cases.
Behind the spurt in shares lies active central banks. At the end of 2018 the Federal Reserve was still threatening to move rates higher, with other central banks talking about normalising policy after years of low rates and offering substantial liquidity to markets with new money. We head to the end of 2019 after a series of concerted interest rate cuts by central banks around the world, with Japan and the Euro-area carrying out substantial quantitative easing programmes and with the Fed offering a lot of financial support to money markets. Will this monetary about-turn be sufficient to end the industrial slowdown?
At the heart of the industrial woes lies a series of structural issues affecting the vehicle industry, which also spills over into the energy industries. The intensification of concerns of the Chinese and European authorities about carbon dioxide emissions and the general environmental impact of coal, oil and the combustion engine on the natural world has quickened the pace of change in the way we travel and keep warm.
There is a wish to move away from dependence on coal, to cut the amount of oil and gas used, to step up renewables and to switch vehicles where possible from hydrocarbons to electricity. The move away from coal, oil and gas will affect the demand for investment goods for new mines and wells. There will be offsets with more demand for solar panels, heat pumps, wind farms and other renewable technologies. The wish to make major changes to how we drive has led to bans and tougher regulatory standards on diesel and petrol vehicles, to higher taxes on traditional cars and vans, and to subsidies for electric and hybrid vehicles.
All this change has succeeded in putting off many customers from buying the well-known diesel vehicles for fear of worse bans and higher taxes ahead. Meanwhile, there is still a reluctance to buy electric vehicles in large volumes, despite the financial incentives. People worry about range, recharging, battery life and the overall cost. Between January and October, US car sales overall were down almost 10%. In the EU, car sales were down 1.6% between January and September. European figures were flattered by the sharp fall in the previous September when new rules came in limiting exhaust emissions. In China, auto sales fell again in September, the fifteenth monthly decline. China’s fall was in small measure worsened by a 34% decline in new electric vehicles following a halving of the subsidy paid to a new buyer.
Catching up with Tesla
In the US, Tesla has been topping the sales charts for electric vehicles. Ford has now announced it wants to launch an all-electric Ford Mustang to try to put more excitement into its electric car offerings to catch up with its new rival. In Germany, VW has launched a new electric car. There is a €6,000 subsidy for electric cars costing less than €40,000 to try to kick start the mass market.
It is taking time to woo the customers and to get the products right. German Chancellor Angela Merkel, who is seeking 1 million charging points in Germany by 2030, is providing for 50,000 charging stations by 2022. The US is also in need of a big expansion in charging points for an electric revolution to take off. This provides some of the explanation for the poor industrial figures.
Last month, US industrial output fell thanks to a mild month cutting energy demand and to the GM strike compounding car sales weakness. There should be some rebound in the US figures in the last two months of the year, as colder weather boosts energy demand and as the car market recovers from the GM dispute. Elsewhere, China is still slow to boost its economy enough, held back by worries about debt levels, whilst the Euro-area is offering the biggest threats to traditional car makers and buyers. We should be somewhere near the bottom of the industrial cycle, but need to be aware that the structural changes for the green revolution will continue to affect the levels of activity substantially in different sectors and products.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.