Healthier Developed Economies Lift Global Outlook
The global economic outlook has turned brighter as several major economies are improving. Both business and consumer sentiment have become healthier across most regions, as the policy uncertainties that plagued several countries last year have faded. The U.S. economy is expected to accelerate further in 2014, while Europe and Japan are also likely to see faster growth. The U.K. is likely to be one of the fastest growing economies in the developed world while Canada is forecast to expand more than 2 percent. The outlook for emerging economies is more subdued, though China and India are likely to see moderate improvements in growth when compared to 2013. The International Monetary Fund has lifted its global growth forecast to 3.7 percent for 2014 and maintained the 2015 estimate at 3.9 percent.
Global equity prices saw moderate gains in December, helped by further expansion in the developed markets. Emerging markets underperformed again as political and fiscal concerns resurfaced in countries such as Turkey and Thailand. Global manufacturing and services activity gained further in December, helped by gains across the developed and emerging countries. New order flows in the manufacturing sector also saw growth as businesses appear to be turning more confident about demand growth. Better than expected trade data from select Asian countries also confirmed the improving global demand, which is expected to sustain as consumer spending continues to improve in the U.S. and Europe.
Global equity prices saw marginal gains in November, as most markets saw consolidation after two months of robust returns. Global manufacturing and services sectors expanded further during November, helped by gains across the developed and emerging economies. Data on new order flows and export demand were healthy, which supports the recent external trade trends from Asia.
Global industry spotlight for the month: Automobiles
Global automakers had an excellent year in 2013 and more efficient vehicles as well as replacement demand could help sustain healthy growth in the coming years.
By most measures, the year 2013 was a very good year for the global auto industry as annual volumes rose to nearly 83 million units according to IHS Automotive. Volumes continued to surge in China and the U.S., the top two markets. Europe saw signs of a revival in demand while sales in Japan were almost unchanged from the previous year, which is better than most forecasts. Sustained demand growth and better cost management helped most large global auto makers improve their financial performance during the year. The luxury segment of the market, which was unaffected even during the recession, continued to see the strongest volume gains. The auto ancillaries too had an excellent year as relatively subdued prices of industrial materials and other inputs helped improve margins.
In the U.S., light vehicle sales rose nearly 8 percent in 2013 to 15.6 million units and annual volumes have recovered more than 50 percent from the lows of 2009. The major American manufacturers sustained their growth during the year while the Japanese car makers regained their sales momentum in the U.S. market. The cheaper yen also helped Japanese manufacturers boost earnings, as the healthy demand allowed them to limit price discounts. In Europe, most manufacturers saw a demand revival during the last quarter of 2013 that helped them offset most of the volume decline from previous quarters. Demand growth was the strongest in the U.K., followed by Spain where the government revived a subsidy program for buyers replacing older vehicles.
The trends were mixed from the emerging countries as higher interest rates and political disturbances restricted demand in select markets. Aggregate vehicle sales in China, now firmly entrenched as the world’s largest auto market, increased nearly 14 percent to 22 million units. Sales of passenger vehicles in China totaled nearly 18 million units, a gain of 16 percent over the previous year. However, India, Brazil, and Thailand saw declines in sales during the year. Sales continued to rise in Indonesia and South Africa, but the pace of growth declined in both countries.
While higher interest rates could restrict the pace of growth in major markets, rising incomes and replacement demand could help sustain demand at healthy levels. For instance, despite the sales gains in recent years, the average age of light vehicles in the U.S. is still over 11 years. A large number of vehicle owners could start looking to replace their vehicles sooner than later. Improving economic conditions could accelerate this trend in the coming years. Europe is also facing a similar situation, though easier access to public transport could limit the scale of replacement demand in the region. Growth could also moderate in China, if the government puts in place restrictions on vehicle ownership to control pollution. IHS Automotive estimates that total global sales could exceed 100 million by 2018, and China would account for nearly 30 percent of the global market.
Efforts by automakers to improve fuel efficiency by adopting better engine and manufacturing technologies are making vehicles more cost effective to run. Engines have become significantly more efficient over the last decade, and lower capacity engines are increasingly being used in heavier vehicles. In addition, advances in manufacturing such as increased use of lighter aluminum to bring down body weight have also made vehicles more fuel efficient. Recent product announcements suggest that some of the best-selling trucks and SUVs will be mostly made of aluminum in the future, shaving hundreds of pounds from their body weight. These changes should make these vehicles more affordable for consumers and limit the aggregate increase in fuel demand.
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