Moody’s cuts global carmakers’ outlook to negative as Brexit weighs in
Rating agency Moody’s has downgraded its outlook on the global auto industry from stable to negative due to political challenges such as US tariffs and a potential no-deal Brexit.
The firm’s Investor’s Service said the move was driven by the expectation that global light vehicle sales are unlikely to recover meaningfully in 2019 and 2020 after declining during the latter part of 2018. Moody’s now expects unit sales growth of just 0.5% in 2019, down from its previous forecast of a 1.2% gain, which had assumed a stronger finish in 2018. For 2020, it expects growth to remain modest at around 0.8%. Both sales forecasts fall below the 1%-3% growth range required to grant a stable outlook.
It added that the auto sector was bearing the brunt of political risks, technological changes and environmental regulation, including the looming possibility of higher US import tariffs and the UK’s potential ‘no-deal’ exit from the European Union. Commenting in further detail on the latter, Moody’s said that a no-deal scenario would change the operating landscape for the global auto industry; disrupting the operations of Japanese, UK and some German automakers that have notable production capacity in the UK and ensuring UK-made cars imported into the EU would face a 10% auto tariff, in line with the taxes currently paid by non-EU countries.
“The UK production of these automakers is highly interconnected to the EU, and so a no-deal Brexit will create a significant negative impact through various channels, most notably, the cessation of tariff-free automobile trade with EU countries,” said Motoki Yanase, a Moody’s vice president and senior credit officer.
Further, additional time and documentation to clear customs could require automakers to increase inventory levels, while higher unemployment in the UK, reflecting economic damage from a no-deal Brexit, would contain wage pressures arising from weaker EU migration.
Commenting on the other pressures facing global automakers, Moody’s also said that continued investments in new technologies, such as autonomous driving, connectivity and advanced safety features, would be more challenging as unit sales flatten. Stricter environmental standards, such as the EU emission reduction target of in average 95g/km on average as of 2020/21 will force auto manufacturers to increase R&D expenditures and launch more fuel-efficient models or sales incentives in order to avoid penalty payments.
It also announced its forecasts for the different global markets:
- US sales will decline. Moody’s expect US light vehicle sales to decline by 2.9% in 2019 and 0.6% in 2020, as the financing environment tightens up. Its forecast for 2019 unit sales remains unchanged at 16.8 million, but stronger-than-expected sales at the end of 2018 will pose a more difficult year-over-year comparison than it had previously expected.
- Western Europe to rebound modestly from depressed volumes in the closing months of 2018. Moody’s is forecasting that Western European car sales to see only “anaemic” growth, with a 0.4% gain in 2019 and a 0.6% increase in 2020. Sales in the early part of 2019 will be soft, weighed down by Brexit-related uncertainties and continued road certification delays following last September’s implementation of WLTP emissions standards. In Germany, sales are expected to remain nearly flat around still-high absolute levels, with Spain the only European market where it expects more than 1% growth through 2020. After plummeting 6.8% in 2018, UK auto sales will stabilise around current levels.
- Chinese auto sales to swing back to growth. Chinese auto sales are expected to grow 2% in 2019 and 1.8% in 2020, rebounding from a difficult 2018 when sales declined due to weaker corporate and consumer sentiment resulting from US-China trade tensions and a difficult year-over-year comparison due to an expired tax cut. Moody’s believes auto unit sales growth will be driven by annual Chinese GDP growth of 6% in 2019 and 2020, as well as policy guidance announced by the central government in January to boost auto purchases. China’s rising yet still low vehicle penetration rate will continue to support auto sales growth.
- Japanese auto sales growth to be modest but steady. The firm is predicting that light vehicle sales in Japan will grow 0.9% in 2019 and 0.7% in 2020, similar to 0.7% growth in 2018. Additional demand ahead of an anticipated consumption tax hike in October could temporarily support growth, but the pull-forward effect on sales could be limited by the government’s plans to alleviate the tax burden by lowering the tax on car sales at the same time.
- India sales to be strong, Korea sales modest. Indian light vehicle sales will remain strong, surging 6% in 2019 from an already high base of 4.0 million unit sales in 2018, when sales jumped 8.4%, according to Moody’s. Sales will be buoyed by supportive macroeconomic fundamentals; the company expects Indian GDP growth of 7.3% in both 2019 and 2020. Meanwhile uncertainty around the outcome of the nation’s legislative elections this summer could dampen auto demand, buying ahead of India’s transition to the equivalent of Euro stage VI emission norms in April 2020 supports Moody’s growth estimates. Looking ahead into 2020, the firm expects auto demand to stay strong, but soften mildly with 5% volume growth. It also predicts that auto sales in Korea will decline by 1.3% in 2019 and 1.7% in 2020, given the expiry of tax cut in the second half of 2019 and soft consumer sentiment.