Cars are driving us into recession
- 7 million Americans have gone into "serious delinquency" on their car loans.
- The automobile industry in both the US and Europe - for different reasons - has started to look like a serious drag on the Western economy that threatens to tip both continents into recession.
- In Europe, many people have simply stopped buying cars.
More than 7 million Americans have gone into "serious delinquency" on their car loans, according to the Federal Reserve Bank of New York, and that is one of the reasons the US Fed has become more cautious about raising interest rates.
In fact, the automobile industry in both the US and Europe - for different reasons - has started to look like a serious drag on the Western economy that threatens to tip both continents into recession. In America, it's auto-loan debt. In Europe, many people have simply stopped buying cars.
Both factors suggest that consumers feel their finances are no longer robust enough to handle big-ticket purchases.
First, in the US, an increasing number of Americans have apparently become too poor to continue paying for the cars they drive. 90-day past-due delinquencies among 18-to-29-year-olds are already at the same level they were back in 2008, during the financial crisis:
Now look at what has happened in the eurozone, the 19 European countries that use the euro currency:
What is happening in Europe is complicated, and not directly correlated to auto-loan debt. But it's having the same effect: People have reduced the car-buying by as much as 10%, and that's threatening to tip Europe into recession.
In Germany - the world's fourth-largest economy and Europe's driving manufacturing force - new-car buying fell off a cliff in the last few months.
Economists have more recently been cheered by an uptick in sales, but they are still rising from a steep trough and well below the level they were at a year ago:
Disastrous auto sales are one of the major factors in hurting the German economy, which went into a technical recession in Q3 2018 and appears to have stagnated, with exactly 0.0% growth, in Q4 2018:
Britain has problems too. This is new car registrations in the UK:
Since 2017, British consumers seem to have permanently shaved about 10 percentage points off their demand for new cars.
The German and British car markets are closely linked. Unsurprisingly, Brexit - especially if Britain leaves the European Union with no trade deal - will hurt both of them. Oxford Economics estimates "no deal" will cut 0.3 percentage points from Europe's manufacturing economy, but up to 0.7 points from the car industries.
"Particularly vulnerable would be the German and Spanish industries, with output falling 0.6 ppt and 0.8 ppt below baseline over the same period," Oxford analyst Stephen Foreman told clients recently.
Cars are being hit in Europe over a variety of factors. The fake diesel testing scandal has deterred people from buying new diesel models. Makers have had to retool their plants to cope with new WLTP regulations that improve emissions and fuel consumption standards, and that has reduced production. There is some anecdotal evidence that the popularity of ride-sharing apps like Uber has reduced people's desire to replace their private cars. And in Britain a change in vehicle tax ramped up sales in 2017, thus depressing them afterwards.
But all of that, coupled with the US delinquent debt problem, has had tangible macro results:
- Italy is already in recession.
- Germany has exactly zero GDP growth.
- In the UK, GDP growth was revised down to 0.2% for Q4 2018.
- And the Fed has difficulty gauging how much distress American workers are in.
Read more:
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British people have suddenly stopped buying cars