NEW YORK -- The global economy will do “fairly well” in the coming years, with the U.S. economy leading the way, while Europe “has turned a corner,” a leading economist said.
Speaking at the NADA/J.D. Power Automotive Forum here, Nariman Behravesh, chief economist for IHS, said that global GDP growth should be 3 percent this year, up from 2.5 percent in 2013.
However, growth in BRIC countries -- Brazil, Russia, India and China -- has been disappointing in recent years, because the easy credit boom of the early 2000s went into a consumption binge, rather than capital investment or infrastructure. And a continued slump in Chinese economic growth could reverberate through Asian markets, Behravesh said.
Although the U.S. economy has been hit by the headwinds of consumers holding less debt -- which means less spending -- and the government’s fiscal austerity programs -- tax hikes, the sequester and government shutdown -- it still is seeing less fiscal drag thanks to a boom in the U.S. oil and gas exploration. That acceleration in those industries, including chemicals and steel, has created 2 million direct, indirect and induced jobs, Behravesh said.
In addition, the Federal Reserve, while tapering its long-term debt purchases, is still providing a stimulus by holding down mortgage rates, Behravesh said. Household debt remains above 110 percent of disposable income, down from a peak of 130 percent in 2008, but that level should be below 100 percent by 2020.
The culmination of these items has led U.S. peak employment to return to pre-recession 2008 levels, with unemployment heading down to 6 percent.
However, “emerging markets will continue to disappoint,” Behravesh said.
Since 2010, there has been a sharp drop in GDP growth from BRIC countries. In addition to the cyclicality of oil prices, the practice of off-shoring jobs and supply chains from the United States and Europe to emerging markets has slowed.
“That source of growth is no longer there. Asia-Pacific is very vulnerable to a Chinese slowdown. Chinese debt-to-GDP ratio has doubled since 2007, and half that debt is in shadow banks like trusts, where you don’t know where these are and how much bad debt there is,” Behravesh said.
“No country has seen a rise in debt without something bad happening -- which could have huge ripple effects around the world. China’s credit bubble bursting is the single biggest risk out there,” he added.
Emerging markets dominate
How does this translate to global auto sales?
Despite the BRIC slowdown, the trend of emerging markets dominating the majority of auto sales will continue, said John Humphrey, J.D. Power senior vice president of global automotive operations.
Mature markets held 70 percent of total auto sales in 2004; now it’s just 44 percent. In 2020, global auto sales should account for 114 million sales, of which 54 million will come from Asia alone -- and 35 million of that amount in China alone.
Still, the BRIC markets slowdown presents a worry.
“They were supposed to gain in economic development with more people coming into middle class, but it hasn’t worked out in the auto sector. Brazil, Russia and India failed to live up to the hype. Only China paid off,” Humphrey said.
While the United States represents a shrinking percentage of the global auto sales pie, it is still crucial.
Replacement demand for the aging vehicle fleet is growing. Subprime customers are coming back to market and getting credit. The days-to-turn ratio is flat. Incentives as a percent of sticker price are down. And with an increased emphasis on leasing and 72-month loans, although the average transaction price of a car has grown $4,000 in the last decade, monthly payments have stayed flat.
“The health of the auto industry is far greater than it ever has been,” Humphrey said. “We’re seeing restraint and discipline.”