After the initial optimism about lower energy prices supporting a healthier global economic growth outlook, investors and analysts have become more apprehensive as the price decline has been remarkably steep. At prices below $50 a barrel for the Brent crude oil benchmark, the large oil producers will see a substantial fall in their export revenues. Countries such as Russia have already slipped into a recession while others are expected to see sharply slower growth. This is likely to result in lower investments in infrastructure and other projects in these countries, which could hurt suppliers of equipment and services in other parts of the globe. In addition, concerns about the risks of deflation in the Euro-zone are also growing. Nevertheless, the gains from cheaper fuel prices for consumers across the world are likely to exceed the negative effect on producing countries.
Third quarter U.S. economic growth of 5 percent annualized was well above expectations and has brightened the outlook for 2015. U.S. labor markets continue to see solid gains and consumer sentiment has improved further. In Europe, retail sales data have shown sustained improvement while the unemployment rate for the EU has declined. The European Central Bank did not announce any major policy decisions after its December meeting, but a substantial quantitative easing program is widely expected in the near term. The Japanese economy is yet to see a rebound in consumer spending, but further monetary easing and lower fuel prices could lift demand in 2015. Global manufacturing output continued to expand during December, but the pace moderated from the previous month. Output growth in the U.S. and Euro-zone was slower and Chinese factory output was unchanged from the previous month. Japan, India and Mexico reported gains in manufacturing activity during December.
GLOBAL INDUSTRY SPOTLIGHT FOR THE MONTH: AUTOMOBILES
The automobile industry is widely regarded as one of the major beneficiaries of lower oil prices. While the industry has been in a sustained uptrend in recent years, cheaper fuel is expected to help maintain the sales volume growth in 2015. Lower costs of other materials such as steel and rubber used in car manufacturing also favor the auto manufacturers. However, some of the potential demand gains for the mass market manufacturers from cheaper oil could be offset by the reduced incentive for consumers to switch to new, more fuel efficient vehicles. On the other hand, manufacturers of larger cars and light trucks could benefit more as low fuel efficiency is unlikely to discourage potential buyers.
Automobile manufactures were among the select industrial sectors that saw a relatively quick rebound in sales volumes after the decline that followed the 2008 global financial crisis. Though volume gains in markets such as Europe remain weak, China and the U.S. have seen robust recoveries. More recently, while the U.S. market continues to expand at a healthy pace, sales growth in China has started showing signs of moderating. If other factors such as interest rates and government policies remain favorable, lower fuel prices could potentially reenergize automobile demand. This may be true for most large markets, including India that is now witnessing a moderate recovery in sales volumes for both passenger and commercial vehicles.
However, lower fuel prices also offset one of the major drivers of automobile demand in the post-recession recovery. Encouraged by tighter regulatory requirements, vehicle fuel efficiency has improved significantly in recent years. For consumers constrained by low income growth during the recession and early recovery, replacing older cars with new models that cost less to drive was financially attractive. The quick rebound in fuel prices after 2009 tilted the equation even more in favor of new vehicles. Now with fuel prices at their six year low, better fuel efficiency is unlikely to hold as much appeal for consumers as earlier.
At the same time, as fuel costs become less of a concern, consumers are likely to prefer larger vehicles that are perceived to be more comfortable, safer and prestigious to own. Demand for SUVs and crossovers is likely to get a further boost, especially in the U.S. where people drive longer distances when compared to most other major car markets. Luxury vehicles, which are in general less fuel efficient when compared to cheaper models, are also likely to be seen more favorably by consumers.
In addition to lower energy costs, the decline in prices of other industrial commodities should also benefit automobile manufacturers. The price of steel, the major input in car manufacturing, is also at a multi-year low. Rubber, used to make tires and other components, is also substantially cheaper than in recent years. The fall in oil prices should also reduce the cost of other inputs such as paint, which is made from petroleum products. In a favorable demand environment, lower input costs should allow the automobile manufacturers to improve their margins.
However, auto makers that made substantial investments in hybrid and electric cars are likely see lower consumer interest while fuel prices remain low. The major selling point of most of hybrid and electric vehicles, which are relatively more expensive than conventional cars, is improved fuel efficiency. As the running cost efficiency gap has narrowed or disappeared, manufacturers will find it difficult to justify the higher initial costs of hybrid and electric cars. This could also reduce and delay additional investments in improved hybrid and electric vehicle technology.
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