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COVID-19 Will Batter Global Auto Sales And Credit Quality

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While China appears to be starting to rein in the coronavirus outbreak, Europe and the U.S. are testing their capacity to contain the virus' spread. S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure," published on March 17, 2020, on RatingsDirect). As the situation evolves, we will update our assumptions and estimates accordingly.

In these circumstances, we expect a material decline of light vehicle demand globally. We expect this decline will be particularly severe in the second quarter of the year, only gradually recovering thereafter provided that restrictive measures are effective in slowing contagion.

In our updated scenario, global light vehicle sales will likely decline by almost 15% in 2020 to less than 80 million units (versus 90.3 million in 2019).

Table 1

We Are Further Lowering Our Global Light Vehicle Sales Forecast
% year-on year change
--Previous projections*-- --New projections*--
2020f 2021f 2020f 2021f
U.S. (3) (1.80) (15)-(20) 10-12
China (5) 2-3 (8)-(10) 2-4
Europe (3) 0 (15)-(20) 9-11
Rest of the World (3) 0 (15) 6-8
Previous projections are as of March 5, 2020; new projections as of March 23, 2020. Source: S&P Global Ratings.

In response to fading demand, the large majority of global auto manufacturers have announced production shutdowns at most of their plants in Europe and in the U.S., and have switched to liquidity protection mode. Our revised sales scenario indicates intense credit pressures ahead for automakers. We expect that potential government stimulus packages and central banks' action to facilitate access to funding will only partially relieve these pressures.

In Europe, we now expect GDP to decline by 0.5% to 1% in 2020. Given our expectation of increasing social distancing measures and a progressive shutdown of commercial activities throughout Europe in an effort to curb contagion risk, we believe light vehicle sales are likely to decline in the 15%-20% range this year. We don't expect a bounce-back in 2021, but only a limited recovery, which would bring units sold to around 19 million (from 20.7 in 2019).

In the U.S., revised GDP forecasts indicate marginally negative growth in the first quarter and a heavier decline in the second quarter, before recovery begins in the second half of the year. After incorporating falling consumer sentiment, stock market declines, the impact of oil market-related demand, a liquidity crunch, and higher than expected unemployment claims, we forecast a fall in 2020 light vehicle sales in the same order of magnitude as in Europe (a 15%-20% decline). We forecast a low double-digit recovery in 2021, before the market settles at around 16 million units in 2022.

Despite evidence of recovery in China, we think it's likely that light vehicle sales will decline in the 8%-10% range this year on the back of the material first-quarter shock that has lead us to lower our forecasts of GDP growth to 2.9% in 2020. While 90% of the country's automakers have resumed production, we expect utilization rates to be running low and anticipate that companies will only slowly adjust production due to a gradually recovering supply chain and demand. The above scenario incorporates moderate stimulus from local governments, but does not factor in large-scale central government-led stimulus, which could be in the form of a significant purchase tax cut. It also excludes the possibility that production ramp-up might be disrupted by a shortage of components, owing to prolonged shutdowns at key overseas auto suppliers.

Related Research

  • The Global Recession Is Here And Now, March 17, 2020
  • Asia-Pacific Recession Guaranteed, March 17, 2020
  • The Sudden Economic Stop will Bring Intense Credit Pressure, March 17, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Vittoria Ferraris, Milan (39) 02-72111-207;
vittoria.ferraris@spglobal.com
Claire Yuan, Hong Kong (852) 2533-3542;
Claire.Yuan@spglobal.com
Nishit K Madlani, New York (1) 212-438-4070;
nishit.madlani@spglobal.com
Katsuyuki Nakai, Tokyo (81) 3-4550-8748;
katsuyuki.nakai@spglobal.com

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