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Europe Sales and Production Commentary- February 2023
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January 2023: +3.6%; 1.160 million units vs. 1.120 million units
- The latest European forecast has brought a glimmer of positivity. However, the comparison with pre-pandemic volumes highlights how far registrations have dropped. The growth rate during the month is compared with January 2022, when the full extent of the semiconductor supply issues started to emerge. European light vehicle registrations improved compared with the previous months and posted an increase of 3.6% year on year (y/y) in the January forecast. The slow recovery in January was exacerbated by the improved but ongoing semiconductor situation. Also, the war in Ukraine continues to hold the market back. With inventory having already been whittled back and a lack of components causing many to halt production in 2022, vehicle availability significantly dropped, causing far weaker registrations. Although there has been some improvement in this situation, major OEMs continue to struggle to source enough components to address lengthy waiting lists. The main factor that will be hitting its performance will again be the shortage of semiconductors. Despite the impact of the semiconductor supply situation in January, vehicle availability should improve somewhat in 2023-24. Passenger car registrations in the European region will likely increase 6.2% y/y during 2023 to about 15.8 million units. However, this will be about 21% below the five-year pre-COVID-19 pandemic average.
- Sales in Europe fell 20.9% in January 2023 compared with the same period in 2020, before the crisis. The increase in the region last month was determined by opposing trends between the EU26+ European Free Trade Association (EFTA) and the Eastern European market. The main factor that will affect its performance will again be the shortage of semiconductors. This hit most OEMs' production from early 2021, but the semiconductor shortage still significantly affects sales volumes throughout the region. Nevertheless, there were strong gains in some markets. The strongest gains were seen in markets, such as Belgium (up 20.8%), Austria (up 19.5%), Greece (up 89.8%), Italy (up 16.4%), Portugal (up 44.8%), Spain (up 49.1%) and the United Kingdom (up 14.8%). Some markets posted wins in January, such as France (up 8.2%), the Netherlands(up 7.7%), and Denmark (up 1.3%). In contrast, markets such as Finland (down 7.6%), Germany (down 1.6%), Sweden (down 24.0%), and Norway (down 58.6%) posted losses in January.
- Moreover, the implemented car stimulus programs still directly affect the recovery of the different markets, although some of these programs that started after the strict lockdowns in 2020 have already stopped or the incentives were lowered. Looking back to 2022, the Western European market started weak into first quarter 2022. However, with the increasing shortages of semiconductors and the start of the Russia-Ukraine conflict, the region's performance gradually weakened so that demand surpassed supply. This resulted in long-waiting periods for ordered new vehicles, as well as increased demand and prices on the used-car markets. Recovery cycles will largely be determined by the normalization of semiconductor supplies that started in the final quarter of 2022. The risk of another winter of high COVID-19 infections and restrictions luckily did not happen. The crisis intensifies operational and economic pressures on an already-stressed global automotive industry, especially as OEMs and suppliers finetune strategies toward coping with "new normal" vehicle demand levels.
- We remain cautious on recovery prospects, with key markets likely to experience differing demand cycles. Light vehicle registrations in the wider Western European region will increase 7.5% y/y in 2023 to about 12.5 million units.However, this would be about 21.0% below the pre-COVID-19 pandemic average in 2015-19.
- We continue to forecast a winter recession. Various headwinds are weighing on domestic and external demand, including high inflation eroding household real incomes, weak sentiment, high uncertainty, and tightening financial conditions. Leading indicators, including our Purchasing Managers' Index™ (PMI™) data, started to pick up in late 2022 but remain at levels indicative of a mild recession. Still, with energy-related risks having diminished recently, we have revised up our real GDP growth forecasts.
- Consumer price inflation will continue to fall in 2023. HICP inflation markedly declined in November and December 2022, under-shooting market consensus expectations in both months, primarily driven by energy prices. Base effects will push down hard on energy and food inflation rates over the coming months, and the moderation in surveys of industrial firms' pricing intentions and declining producer price inflation rates are also indicative of lower core goods inflation. Services inflation rates should also ease as the boost from pent-up demand fades.
- Policy rates will rise further in early 2023. Having delivered exceptional back-to-back 75-basis-point policy rate hikes at its meetings in September and October 2022, the European Central Bank (ECB) raised its deposit facility rate (DFR) by 50 basis points in December 2022 to reach 2%, the highest level since 2008. The ECB's guidance remains indicative of additional rate hikes given concerns about persistently high inflation and related risks, and we forecast a peak for the DFR of 3% in March. This is supporting the euro, which, along with other currencies, has markedly rebounded against the US dollar.
- Longer-term eurozone growth prospects will remain challenging. Looking beyond the short-term headwinds to growth, structural factors will likely restrain eurozone real GDP growth rates. Demographic trends are unfavorable in many member states, while productivity growth has been on a long-term downward trend. Member states with very elevated public-sector debt burdens will also need large, multiyear fiscal adjustments. Market pressure for fiscal tightening will likely build as the European Central Bank (ECB) reduces its policy support. We estimate a long-term potential real GDP growth rate for the eurozone of around 1%.
- Light vehicle registrations in the wider Western European region will increase 7.5% y/y in 2023, compared with the low base in 2022, falling below 11.7 million units. This will be about 21.8% below the COVID-19 pre-pandemic average in 2015-19. However, the market should also continue to grow over the coming years to peak at about 14.0 million units in 2025. Compared with the development in Western Europe, demand in Central Europe was a bit stronger and recorded a solid gain compared with the same month in 2022, with 105,984 units, which means a 12.9% gain. For full-year 2022, the market was down 5.7%. Increases and volume gains in January were evident in many Central European markets, such as Bulgaria (up 9.5%), Hungary (up 14.5%), Poland (up 21.4%), and Romania (up 22.1%). The main negative drivers in January were Slovakia (down 0.7%) and Slovenia (down 1.5%). In addition, Eastern Europe showed a much weaker result compared with the other two markets in the European region. Demand in Eastern Europe during the month fell again (down 34.0%) compared with the same period in 2022. The main reason for this weak volume was the strong loss in the Ukrainian market (down 38.8%), which is related to Russia's invasion in Ukraine. Moreover, the Russian market showed a loss (down 64.1%) compared with the same month in 2022.
- As for full-year 2022, the European light vehicle market posted a loss of 11.2%, with sales of 14,881,293 units, mainly because of the limited supply due to the semiconductor shortages and the Russia-Ukraine conflict. The results were affected by losses in Western Europe (down 6.1%) and strong losses in Eastern Europe (down 33.9%). The Central European region performed only slightly better than the Western European market with a loss of 5.7% for full-year 2022. The semiconductor shortages will affect the short-term development, at least through the first half of 2023.
- Protectionism is a prominent source of concern. The threat of an all-out trade war could be enough to defer some expenditure, especially investment. Emerging-market turbulence is an additional headwind to growth and a source of uncertainty. Political developments in Russia and Turkey, the potential effect on sovereign yields and spreads, and contagion to other member states also merit attention.
- For the western part of the continent, a slight gain is expected in 2023, with an increase of 7.5% to 12.5 million units—about 850,000 units more than in 2022. The Central European region is also expected to improve and to achieve a gain in 2023. We expect a slight gain of 3.9% to about 1.36 million units. The gains in Western and Central Europe combined will reach 13.88 million units in 2023—about 6.9% above the 2022 level, but still more than 4.2 million units fewer than in 2019.
- The Russian-Ukrainian military conflict has caused a major disruption in our short-, medium-, and long-term assumptions in the March forecast round. The current estimates are based on a rather pessimistic scenario, which includes a protracted military stand-off; persisting sanctions against Russia on behalf of the US, the EU, and their allies even after the presidential elections in Russia in 2024; and a slow recovery in Ukraine from the damage caused by the military actions. In 2022, we saw negative dynamics in all Eastern European countries, with the major losses in those involved in the conflict: Ukraine (down 62.1%), Russia (down 60.6%), and Belarus (down 63.3%), which has been sanctioned for offering its territory for Russian troops. The total Eastern European market plunged 33.9% y/y. For 2023, only a slight improvement is expected, the market will likely grow 2.0% up to 1.92 million units.
- In the current S&P Global Mobility scenario, light vehicle sales in Eastern Europe will surpass the volume of 2021 only in 2033. Even then, it will not reach 4 million units. Instead, this should happen in 2028, within the forecast period. In the longer term, Western Europe is not expected to return to the 2007 sales peak level. Some markets may even enter a demotorization phase in the early stages of the next decade. Surprisingly, the recovery path is expected to be on the positive side. Pent-up demand is larger and, above all, releasing far sooner and faster than anticipated. This result was helped by a general environment that has been supportive, which includes extremely low energy prices, fast gains in purchasing power in many countries, and the ECB's monetary policy. However, for the longer term, many of the core issues, including public debt, unemployment, and pension systems, will still be in place. Moreover, Europe will have to cope with structural constraints, such as dull demographics (with some exceptions), increasingly constraining transport legislation, and disruptive social evolutions (e.g., shifts in transport habits and relationship with cars) in the same time frame, which could hamper vehicle sales potential. The continent must also cope with the Brexit effect. Moreover, the transfer to electrification will lead to a phase of uncertainty because it is not clear which concept (plug-in hybrid electric, battery electric, compressed natural gas, fuel cell, gasoline, or diesel) will come out on top. In the private-car buyer sector especially, the uncertainty will continue because no one wants to remain with an "outdated" car or concept. In addition, OEMs' fleet CO2 emissions targets starting from 2020/21 will be a huge challenge for all participants and will affect the market structure, powertrain mix, and car prices. On the positive side, growth in Central European countries should become more sustainable, as the market is far from saturated, and new demand, i.e., newcomers to the new-car market, should keep building, along with wealth and income gains. Eastern Europe should also rebound in the medium-to-long term. Prospects in Turkey are bright, thanks to strong demographic and economic potentials. Russia presents a more complex case. Undoubtedly, this market can easily yield 2.5 million units on a regular basis, but some structural evolutions, e.g., creating a more diversified economy, are necessary to turn the fragile giant into a top player.
January 2023: +7.1%; 1.31 million units vs. 1.23 million units
Western Europe, Central Europe, and Turkey
With this February update, the data for 2022 production is virtually fully actualized. As opposed to the rest of the world where production fell in the fourth quarter over the third quarter, this area saw a sequential improvement of 17% in the last quarter. Looking at year-over-year development, fourth-quarter production grew by 14% in Europe, excluding the Commonwealth of Independent States (CIS), while it grew only marginally in the rest of the world. As a result, production posted year-over-year growth of 22% for the second half, and 5% on the full year.
- Compared with the reference year 2019, European production decreased by 23% with Ford, Renault-Nissan-Mitsubishi, and Jaguar-Land Rover all down by more than 30%; Volkswagen, Stellantis, BMW, and Mercedes-Benz in the range of the regional average; and Hyundai up by 9%.
- Looking at 2023, the general theme of supply chain disruption transitioning to demand concerns remains intact. While fears of production disruptions related to energy inputs have somewhat abated, the flow of chips remains a constraint, and there is increasing concern regarding the weight of demand on the level of output for 2023. Although sequential improvement clearly continued in fourth quarter 2022, the sales outlook becomes critical as inventories are back to pre-semiconductor shortage levels (yet far from pre-COVID levels).
- We are projecting the build pace will stabilize in the near term. Given the weak base of comparison in the first half of the year, it translates into 5% production growth across 2023. After another year of recovery in 2024, volumes should stabilize in the range of 16.5-17.0 million units, more than 3 million units below the peak observed in 2017.
Russia and CIS
- Production is this area has collapsed since the end of February when Russian armed forces invaded Ukraine. Production has been interrupted at most plants in Russia, and the ones still running are in restart mode with very soft volumes. Volumes in the second half of the year are cut by nearly one-half, with Russia itself being down by 70%. Although the outcome of the Russia-Ukraine crisis is highly uncertain, the war will likely be followed by a geopolitical impasse, and most official sanctions will likely be indefinitely in place throughout the forecast. As a result, we expect volumes to remain in the 1-million-unit range through the horizon, while production reached 1.8 million units in 2021 and 2.4 million units in 2012-13.
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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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