Fed’s magic money tree hopes to overcome smartphone sales downturn and global recession risk

Last November, I wrote one of my “most-read posts”, titled Global smartphone recession confirms consumer downturn. The only strange thing was that most people read it several weeks later on 3 January, after Apple announced its China sales had fallen due to the economic downturn.

Why did Apple and financial markets only then discover that smartphone sales were in a downturn led by China?  Our November pH Report “Smartphone sales recession highlights economic slowdown‘, had already given detailed insight into the key issues, noting that:

“It also confirms the early warning over weakening end-user demand given by developments in the global chemical industry since the start of the year. Capacity Utilisation was down again in September as end-user demand slowed. And this pattern has continued into early November, as shown by our own Volume Proxy.

The same phenomenon had occurred before the 2008 Crisis, of course, as described in The Crystal Blog.  I wrote regularly here, in the Financial Times and elsewhere about the near-certainty that we were heading for a major financial crisis. Yet very few people took any notice.

And even after the crash, the consensus chose to ignore the demographic explanation for it that John Richardson and I gave in ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’.

Nothing seems to change.  So here we are again, with the chart showing full-year 2018 smartphone sales, and it is clear that the consumer downturn is continuing:

  • 2018 sales at 1.43bn were down 5% versus 2017, with Q4 volume down 6% versus Q4 2017
  • Strikingly, low-cost Huawei’s volume was equal to high-priced Apple’s at 206m
  • Since 2015, its volume has almost doubled whilst Apple’s has fallen 11%

And this time the financial outlook is potentially worse than in 2008.  The tide of global debt built up since 2008 means that the “World faces wave of epic debt defaults” according to the only central banker to forecast the Crisis.

“WALL STREET, WE HAVE A PROBLEM”

So why did Apple shares suddenly crash 10% on 3 January, as the chart shows? Everything that Apple reported was already known.  After all, when I wrote in November, I was using published data from Strategy Analytics which was available to anyone on their website.

The answer, unfortunately, is that markets have lost their key role of price discovery. Central banks have deliberately destroyed it with their stimulus programmes, in the belief that a strong stock market will lead to a strong economy. And this has been going on for a long time, as newly released Federal Reserve minutes confirmed last week:

  • Back in January 2013, then Fed Governor Jay Powell warned that policies “risked driving securities above fundamental values
  • He went on to warn that the result would be “there is every reason to expect a sharp and painful correction
  • Yet 6 years later, and now Fed Chairman, Powell again rushed to support the stock market last week
  • He took the prospect of interest rate rises off the table, despite US unemployment dropping for a record 100 straight months

The result is that few investors now bother to analyse what is happening in the real world.

They believe  they don’t need to, as the Fed will always be there, watching their backs. So “Bad News is Good News”, because it means the Fed and other Western central banks will immediately print more money to support stock markets.

And there is even a new concept, ‘Modern Monetary Theory’ (MMT), to justify what they are doing.

THE MAGIC MONEY TREE PROVIDES ALL THE MONEY WE NEED

There are 3 key points that are relevant to the Modern Monetary Theory:

  • The Federal government can print its own money, and does this all the time
  • The Federal government can always roll over the debt that this money-printing creates
  • The Federal government can’t ever go bankrupt, because of the above 2 points

The scholars only differ on one point.  One set believes that pumping up the stock market is therefore a legitimate role for the central bank. As then Fed Chairman Ben Bernanke argued in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

The other set believes instead that government can and should spend as much as they like on social and other programmes:

“MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.

The result is that almost nobody talks about debt any more, and the need to repay it.  Whenever I talk about this, I am told – as in 2006-8 – that “I don’t understand”.  This may be true. But it may instead be true that, as I noted last month:

“Whilst Apple won’t go bankrupt any time soon, weaker companies in its supply chain certainly face this risk – as do other companies dependent on sales in China. And as their sales volumes and profits start to fall, investors similarly risk finding that large numbers of companies with “Triple B” ratings have suddenly been re-rated as “Junk”:

  • Bianco Research suggest that 14% of companies in the S&P 1500 are zombies, with their earnings unable to cover interest expenses
  • The Bank of International Settlements has already warned that Western central banks stimulus lending means that >10% of US/EU firms currently “rely on rolling over loans as their interest bill exceeds their EBIT. They are most likely to fail as liquidity starts to dry up”.

I fear the coming global recession will expose the wishful thinking behind the magic of the central banks’ money trees.

Chart of the Year – China’s shadow banking collapse means deflation may be round the corner

Last year it was Bitcoin, in 2016 it was the near-doubling in US 10-year interest rates, and in 2015 was the oil price fall.  This year, once again, there is really only one candidate for ‘Chart of the Year’ – it has to be the collapse of China’s shadow banking bubble:

  • It averaged around $20bn/month in 2008, a minor addition to official lending
  • But then it took off as China’s leaders panicked after the 2008 Crisis
  • By 2010, it had shot up to average $80bn/month, and nearly doubled to $140bn in 2013
  • President Xi then took office and the bubble stopped expanding
  • But with Premier Li still running a Populist economic policy, it was at $80bn again in 2017

At that point, Xi took charge of economic policy, and slammed on the brakes. November’s data shows it averaging just $20bn again.

The impact on the global economy has already been immense, and will likely be even greater in 2019 due to cumulative effects.  As we noted in this month’s pH Report:

“Xi no longer wants China to be the manufacturing Capital of the world. Instead his China Dream is based on the country becoming a more service-led economy based on the mobile internet.  He clearly has his sights on the longer-term and therefore needs to take the pain of restructuring today.

“Financial deleveraging has been a key policy, with shadow bank lending seeing a $609bn reduction YTD November, and Total Social Financing down by $257bn. The size of these reductions has reverberated around Emerging Markets and more recently the West:

  • The housing sector has nose-dived, with China Daily reporting that more than 60% of transactions in Tier 1 and 2 cities saw price drops in the normally peak buying month of October, with Beijing prices for existing homes down 20% in 2018
  • It also reported last week under the heading ’Property firms face funding crunch’ that “housing developers are under great capital pressure at the moment”
  • China’s auto sales, the key to global market growth since 2009, fell 14% in November and are on course for their first annual fall since 1990
  •  The deleveraging not only reduced import demand for commodities, but also Chinese citizens’ ability to move money offshore into previous property hotspots
  • Real estate agents in prime London, New York and other areas have seen a collapse in offshore buying from Hong Kong and China, with one telling the South China Morning Post that “basically all Chinese investors have disappeared “

GLOBAL STOCK MARKETS ARE NOW FEELING THE PAIN

As I warned here in June (Financial markets party as global trade wars begin), the global stock market bubble is also now deflating – as the chart shows of the US S&P 500.  It has been powered by central bank’s stimulus policies, as they came to believe their role was no longer just to manage inflation.

Instead, they have followed the path set out by then Federal Reserve Chairman, Ben Bernanke, in November 2010, believing that:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Now, however, we are coming close to the to the point when it becomes obvious that the Fed cannot possibly control the economic fortunes of 325m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted by central banks in this  failed experiment.

The path back to fiscal sanity will be very hard, due to the debt that has been built up by the stimulus policies.  The impartial Congressional Budget Office expects US government debt to rise to $1tn.

Japan – the world’s 3rd largest economy – is the Case Study for the problems likely ahead:

  • Consumer spending is 55% of Japan’s GDP.  It falls by around a third at age 70+ versus peak spend at 55, as older people already own most of what they need, and are living on a pension
  • Its gross government debt is now 2.5x the size of its economy, and with its ageing population (median age will be 48 in 2020), there is no possibility that this debt can ever be repaid
  • As the Nikkei Asian Review reported in July, the Bank of Japan’s stimulus programme means it is now a Top 10 shareholder in 40% of Nikkei companies: it is currently spending ¥4.2tn/year ($37bn) buying more shares
  • Warning signs are already appearing, with the Nikkei 225 down 12% since its October peak. If global stock markets do now head into a bear market, the Bank’s losses will mount very quickly

CHINA MOVE INTO DEFLATION WILL MAKE DEBT IMPOSSIBLE TO REPAY

Since publishing ‘Boom, Gloom and the New Normal: how the Ageing Boomers are Changing Demand Patterns, Again“, in 2011 with John Richardson, I have argued that the stimulus policies cannot work, as they are effectively trying to print babies.  2019 seems likely to put this view to the test:

  • China’s removal of stimulus is being matched by other central banks, who have finally reached the limits of what is possible
  • As the chart shows, the end of stimulus has caused China’s Producer Price Inflation to collapse from 7.8% in February 2017
  • Analysts Haitong Securities forecast that it will “drop to zero in December and fall further into negative territory in 2019

China’s stimulus programme was the key driver for the global economy after 2008.  Its decision to withdraw stimulus – confirmed by the collapse now underway in housing and auto sales – is already putting pressure on global asset and financial markets:

  • China’s lending bubble helped destroy market’s role of price discovery based on supply/demand
  • Now the bubble has ended, price discovery – and hence deflation – may now be about to return
  • Yet combating deflation was supposed to be the prime purpose of Western central bank stimulus

This is why the collapse in China’s shadow lending is my Chart of the Year.

Asian downturn worsens, bringing global recession nearer

The chemical industry is the best leading indicator for the global economy.  And my visit to Singapore last week confirmed that the downturn underway in the Asian market creates major risks for developed and emerging economies alike.

The problem is focused on China’s likely move into recession, now its stimulus policies are finally being unwound.  And the result is shown in the above chart from The pH Report, updated to Friday:

  • It confirms that the downturn began before oil prices peaked at the beginning of October, confirming that companies were responding to a downturn in end-user demand
  • Since then, of course, the oil price has – rather dramatically – entered a bear market, with prices down by nearly a third

The question now is whether finance directors will choose to aggressively destock ahead of year-end results, to mitigate the volume decline with a decline in working capital. This would be a bold move given continuing geo-political uncertainty in the Middle East, and would also conflict with the more upbeat guidance that was given earlier with Q3 results.

But a review of ICIS news headlines over the past few days suggests they may have little choice.  Inventories are described as “piling up” in a wide range of major products, including polyethylene – the biggest volume polymer.  Indian producers are even offering “price protection” packages on polypropylene, to safeguard customers from losses if prices fall further.

Asian countries and their major partners (eg Argentina, S Africa, Turkey) were, of course, the first to be hit by China’s downturn.  But Q3’s fall in German GDP shows the downturn has now spread to the Western economy that most benefited from China’s post-2008 stimulus bubble.  As The Guardian noted:

“Goods exports make up 40% of German GDP – a much bigger proportion than for the next two biggest eurozone economies, France and Italy.”

OIL MARKETS CONFIRM THE RECESSION RISK

Of course, consensus opinion still believes that the US economy is sailing along, regardless of any problems elsewhere.  But the chart of oil prices relative to recession tells a different story:

  • The problem is that oil prices have been rising since 2016, with the summer proving the final blow-off peak.  As always, this meant consumers had to cut back on discretionary spending as costs of transport and heating rose
  • The cost of oil as a percentage of GDP reached 3.1% in Q3 – a level which has always led to recession in the past, with the exception of the post-2008 stimulus period when governments and central banks were pouring $tns of stimulus money into the global economy
  • In turn, this means a downturn is now beginning in US end-user demand in critical areas such as housing, autos and electronics

Oil markets have therefore provided a classic example of the trading maxim for weak markets – “Buy on the rumour, sell on the news”.

  • Prices had risen by 75% since June on supply shortage fears, following President Trump’s decision to exit the Iran nuclear deal on November 4
  • As always, this created “apparent demand” as buyers in the US and around the world bought ahead to minimise the impact of higher prices
  • But the higher prices also negated the benefit of the earlier tax cuts for his core supporters just ahead of the mid-term elections, causing Trump to undertake a policy u-turn
  • He is now pushing Saudi Arabia and Russia to maintain production, and has announced 180-day exemptions for Iran’s 8 largest customers – China, India, S Korea, Japan, Italy, Greece, Taiwan and Turkey.

Understandably, oil traders have now decided that his “bark is worse than his bite“.  And with the downturn spreading from Asia to the West, markets are now refocusing on supply/demand balances, with the International Energy Agency suggesting stocks will build by 2mb/d in H1 2019. In response, OPEC are reportedly discussing potential cuts of up to 1.4mb/d from December.

CHINA’S SHADOW BANKING COLLAPSE IS CREATING A NEW FINANCIAL CRISIS

Unfortunately, as in 2008, the collapse in oil prices is coinciding with the end of stimulus policies, particularly in China, as the chart of its shadow bank lending confirms.  This has hit demand in two ways, as I discussed earlier this month in the Financial Times:

  • Just 3 years ago, it was pumping out an average $140bn/month in mainly property-related lending *
  • This created enormous demand for EM commodity exports
  • It also boosted global property prices as wealthy Chinese rushed to get their money out of the country
  • But during 2018, lending has collapsed by more than 80% to average just $23bn in October

China’s post-2008 stimulus programme was the growth engine for the global economy – with the efforts of the Western central banks very much a sideshow in comparison.  It was more than half of the total $33tn lending to date.  But now it is unwinding, prompting the Minsky Moment forecast a year ago by China’s central bank governor:

China’s financial sector is and will be in a period with high risks that are easily triggered. Under pressure from multiple factors at home and abroad, the risks are multiple, broad, hidden, complex, sudden, contagious, and hazardous.”

As I warned then:

“Companies and investors should not ignore the warnings now coming out from Beijing about the change of strategy. China’s lending bubble – particularly in property – is likely coming to an end. In turn, this will lead to a bumpy ride for the global economy.

The bumps are getting bigger and bigger as we head into recession.  Asia’s downturn is now spreading to the rest of the world, and is a major wake-up call for anyone still planning for “business as usual”.

 

* Lending has major seasonal peaks in Q1, so I use rolling 12 month averages to avoid distortions 

Budgeting for the end of “Business as Usual”

Companies and investors are starting to finalise their plans for the coming year.  Many are assuming that the global economy will grow by 3% – 3.5%, and are setting targets on the basis of “business as usual”.  This has been a reasonable assumption for the past 25 years, as the chart confirms for the US economy:

  • US GDP has been recorded since 1929, and the pink shading shows periods of recession
  • Until the early 1980’s, recessions used to occur about once every 4 – 5 years
  • But then the BabyBoomer-led economic SuperCycle began in 1983, as the average Western Boomer moved into the Wealth Creator 25 – 54 age group that drives economic growth
  • Between 1983 – 2000, there was one, very short, recession of 8 months.  And that was only due to the first Gulf War, when Iraq invaded Kuwait.

Since then, the central banks have taken over from the Boomers as the engine of growth.  They cut interest rates after the 2001 recession, deliberately pumping up the housing and auto markets to stimulate growth.  And since the 2008 financial crisis, they have focused on supporting stock markets, believing this will return the economy to stable growth:

  • The above chart of the S&P 500 highlights the extraordinary nature of its post-2008 rally
  • Every time it has looked like falling, the Federal Reserve has rushed to its support
  • First there was co-ordinated G20 support in the form of low interest rates and easy credit
  • This initial Quantitative Easing (QE) was followed by QE2 and Operation Twist
  • Then there was QE3, otherwise known as QE Infinity, followed by President Trump’s tax cuts

In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.  As a result, debt has soared and credit quality collapsed.  One statistic tells the story:

“83% of U.S. companies going public in the first nine months of this year lost money in the 12 months leading up to the IPO, according to data compiled by University of Florida finance professor Jay Ritter. Ritter, whose data goes back to 1980, said this is the highest proportion on record.  The previous highest rate of money-losing companies going public had been 81% in 2000, at the height of the dot-com bubble.

And more than 10% of all US/EU companies are “zombies” according to the Bank of International Settlements (the central banks’ bank), as they:

“Rely on rolling over loans as their interest bill exceeds their EBIT (Earnings before Interest and Taxes). They are most likely to fail as liquidity starts to dry up”.

2019 – 2021 BUDGETS NEED TO FOCUS ON KEY RISKS TO THE BUSINESS
For the past 25 years, the Budget process has tended to assume that the external environment will be stable.  2008 was a shock at the time, of course, but time has blunted memories of the near-collapse that occurred.  The issue, however, as I noted here in September 2008 is that:

“A long period of stability, such as that experienced over the past decade, eventually leads to major instability.

“This is because investors forget that higher reward equals higher risk. Instead, they believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.

This is the great Hyman Minsky’s explanation for financial crises and panics. Essentially, it describes how confidence eventually leads to complacency in the face of mounting risks.  And it is clear that today, most of the lessons from 2008 have been forgotten.  Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.

So prudent companies will prepare for it now, whilst there is still time.  You will not be able to avoid all the risks, but at least you won’t suddenly wake up one morning to find panic all around you.

The chart gives my version of the key risks – you may well have your own list:

  • Global auto and housing markets already seem to be in decline; world trade rose just 0.2% in August
  • Global liquidity is clearly declining, and Western political debate is ever-more polarised
  • Uncertainty means that the US$ is rising, and geopolitical risks are becoming more obvious
  • Stock markets have seen sudden and “unexpected” falls, causing investors to worry about “return of capital”
  • The risks of a major recession are therefore rising, along with the potential for a rise in bankruptcies

Of course, wise and far-sighted leaders may decide to implement policies that will mitigate these risks, and steer the global economy into calmer waters.  Then again, maybe our leaders will decide they are “fake news” and ignore them.

Either way, prudent companies and investors may want to face up to these potential risks ahead of time.  That is why I have titled this year’s Outlook, ‘Budgeting for the end of “Business as Usual“.  As always, please contact me at phodges@thephreport.com if you would like to discuss these issues in more depth.

Please click here to download a copy of all my Budget Outlooks 2007 – 2018.

“What could possibly go wrong?”

I well remember the questions a year ago, after I published my annual Budget Outlook, ‘Budgeting for the Great Unknown in 2018 – 2020‘.  Many readers found it difficult to believe that global interest rates could rise significantly, or that China’s economy would slow and that protectionism would rise under the influence of Populist politicians.

MY ANNUAL BUDGET OUTLOOK WILL BE PUBLISHED NEXT WEEK
Next week, I will publish my annual Budget Outlook, covering the 2019-2021 period. The aim, as always, will be to challenge conventional wisdom when this seems to be heading in the wrong direction.

Before publishing the new Outlook each year, I always like to review my previous forecast. Past performance may not be a perfect guide to the future, but it is the best we have:

The 2007 Outlook ‘Budgeting for a Downturn‘, and 2008′s ‘Budgeting for Survival’ meant I was one of the few to forecast the 2008 Crisis.  2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year, as demand grows in line with a recovery in global GDP“.  Please click here if you would like to download a free copy of all the Budget Outlooks.

THE 2017 OUTLOOK WARNED OF 4 KEY RISKS
My argument last year was essentially that confidence had given way to complacency, and in some cases to arrogance, when it came to planning for the future.  “What could possibly go wrong?” seemed to be the prevailing mantra.  I therefore suggested that, on the contrary, we were moving into a Great Unknown and highlighted 4 key risks:

  • Rising interest rates would start to spark a debt crisis
  • China would slow as President Xi moved to tackle the lending bubble
  • Protectionism was on the rise around the world
  • Populist appeal was increasing as people lost faith in the elites

A year later, these are now well on the way to becoming consensus views.

  • Debt crises have erupted around the world in G20 countries such as Turkey and Argentina, and are “bubbling under” in a large number of other major economies such as China, Italy, Japan, UK and USA.  Nobody knows how all the debt created over the past 10 years can be repaid.  But the IMF reported earlier this year that total world debt has now reached $164tn – more than twice the size of global GDP
  • China’s economy in Q3 saw its slowest level of GDP growth since Q1 2009 with shadow bank lending down by $557bn in the year to September versus 2017.  Within China, the property bubble has begun to burst, with new home loans in Shanghai down 77% in H1.  And this was before the trade war has really begun, so further slowdown seems inevitable
  • Protectionism is on the rise in countries such as the USA, where it would would have seemed impossible only a few years ago.  Nobody even mentions the Doha trade round any more, and President Trump’s trade deal with Canada and Mexico specifically targets so-called ‘non-market economies’ such as China, with the threat of losing access to US markets if they do deals with China
  • Brexit is worth a separate heading, as it marks the area where consensus thinking has reversed most dramatically over the past year, just as I had forecast in the Outlook:

“At the moment, most companies and investors seem to be ignoring these developments, assuming that in the end, sense will prevail. But what if they are wrong? It seems highly likely, for example, that the UK will end up with a “hard Brexit” in March 2019 with no EU trade deal and no transition period to enable businesses to adjust.

“Today’s Populist politicians don’t seem to care about these risks. For them, the allure of arguing for “no deal”, if they can’t get exactly what they want, is very powerful. So it would seem sensible for executives to spend time understanding exactly how their business might be impacted if today’s global supply chains came to an end.”

  • Populism is starting to dominate the agenda in an increasing number of countries.  A year ago, many assumed that “wiser heads” would restrain President Trump’s Populist agenda, but instead he has surrounded himself with like-minded advisers; Italy now has a Populist government; Germany’s Alternativ für Deutschland made major gains in last year’s election, and in Bavaria last week.

The last 10 years have proved that stimulus programmes cannot substitute for a lack of babies. They generate debt mountains instead of sustainable demand, and so make the problems worse, not better.  As a result, voters start to listen to Populists, who offer seemingly simple solutions to the problems which have been ignored by the elites.

Next week, I will look at what may happen in the 2019 – 2021 period, as we enter the endgame for the policy failures of the past decade.

The post “What could possibly go wrong?” appeared first on Chemicals & The Economy.

Global auto market heads for 5% fall as stimulus impact wanes

Top 72016 data highlights one startling statistic about the world’s Top 7 auto markets.  They are 85% of total world sales and as the chart shows, their overall sales growth since 2007 has been entirely due to China:

   China’s sales have risen nearly four-fold since 2007, from 6.3m to 24.2m
   Sales in the other 6 markets were exactly the same in 2016 as in 2007, at 43m

This has been very good news for those who were in China.  Everyone has seen their sales rise – the car companies, the component suppliers and all the service-based industries that supported this fabulous expansion.

There have also been good opportunities in other parts of the world over the period, but also major risks:

   US sales hit a new record in 2016, after a great run since 2009 following GM and Chrysler’s bankruptcy
   The 27-member European Union (EU) has done well since 2013, up nearly a quarter to 14.6m, but is still below 2007′s 15.6m.  (The market peaked back in 1999, when 14.6m cars were sold to the then 15 EU members)
   Japan did well to 2013, but has since fallen to 4.2m; well down on 2004′s peak of 4.8m. (It is back to 1992 levels)
   India set a new record at 2.9m in 2016, double 2007′s level, but fell 19% in December as demonetisation impacted
   Brazil did well till 2012 when sales hit 2.8m, but are now below 2007′s level at 2m
   Russia also soared from 2009, hitting 2.8m in 2012, but has since halved to just 1.4m in 2016

Now global sales are likely heading for a fall.  They would already have been much lower without the support of major stimulus measures.  Governments have been desperate to keep auto sales rising, due to their impact on jobs:

   When China’s sales began to slow in 2015, the sales tax was cut from 10% to 5% for smaller cars with engines below 1.6l – which are mostly produced by Chinese manufacturers.  But now China has raised the tax back to 7.5%, leading the manufacturers’ association to forecast sales growth will fall from 21% in 2016 to just 3% in 2017
   Europe has seen widespread and continuous discounting.  Ford’s European profit was just $259m in 2015: it and Fiat Chrysler made operating margins of less than 1% of sales, and GM continued to lose money.  UK sales have relied on $25.8bn ($28bn) of payments since 2011 for insurance mis-selling, as many claimants used their average £3k compensation as a deposit on a car loan.  VW’s diesel scandal will also have long-term negative impact, given that over half of all European new car sales have been diesel vehicles for the past decade.  Paris, Madrid and Athens have already decided to ban diesel cars completely by 2025.
   The USA has seen discounts reach an average $4k in December, up 20% on 2015.  Leasing and financing deals have also been critical in maintaining auto sales.  Experian data shows 86% of new cars were bought with financing in Q3 2016; the average loan amount is at a record high of $30k, and loan terms average 68 months

Logic therefore suggests the consensus is being extremely optimistic in ignoring today’s increasingly uncertain political background, and assuming global sales will continue to grow in 2017:

   China faces political uncertainty ahead of the critical 19th National Party Congress in Q4.  President Xi is almost certain to be re-nominated for a second 5-year term, but cannot currently rely on maintaining control of the critical Politburo Standing Committee – China’s main decision-making body.
   Europe also faces major political uncertainty, with elections due in The Netherlands, France and Germany – and possibly Italy.  In addition, the UK is highly likely to table its decision to leave the EU in the next few weeks.
   In the US, every two-term Presidency for 100 years has been followed by recession.  President Trump is highly likely to take difficult decisions this year, before next year’s mid-term elections and his own re-election bid in 2020

Another key issue is the impact of falling prices for used cars.  Their volumes are already increasing as all the new cars sold in recent years come back for resale.  China’s Auto Dealer Association expects used car sales to equal those for new cars by 2020, whilst Barclays has warned that US new car “prime and subprime net loss rates are close to multi-year highs because of softening used car values.” 

Then there is the growing impact of taxi services such as Uber and Did, and the rise of car-sharing business models and self-driving cars.  Most Americans, after all, waste a week of their lives in traffic jams each year, and many auto manufacturers are now introducing more service-driven business models as BMW have argued:

“Our core business in the ’70s was selling cars; in the ’80s, late ’70s came the great innovation of leasing and financing.  Now you can pay per use of a car.  It’s like the music industry.  You used to have to buy an album, now you can pay per play.” 

It is not yet clear how bad the downturn will be.  But it would seem prudent to plan for at least a 5% global decline this year, given today’s rising levels of uncertainty and global interest rates.  It will be too late to panic later in the year, once the detail of the downturn has become more obvious.