Bill White’s important critique of the policies being followed by his former central bank colleagues echoes his warnings before the 2008 Crisis. One of his key points is that they have focused on manipulating the value of financial assets, ratehr than on developments in the real economy:
“The price of financial assets, just think of Bunds and equity prices, has gone through the roof as have property prices in many countries. Zombie companies are being kept alive by zombie banks and a sharp increase in Merger and Acquisition activity might also be contributing to growing “malinvestments”. Moreover, problems in the Advanced Market Economies have now spread to 6 of the Emerging Market Economies, with all of the BRIICS in deepening trouble.”
The chart above provides a useful snapshot of the issue, in terms of January – April auto sales in the 4 smaller markets in the ‘Top 7’:
- Japan’s sales were down 15%, with sales of the most popular smaller cars (“kei cars”) dropping 23% as a tax hike went into effect. Awareness of the looming hike had boosted sales in 2014, and now the hangover is underway. The kei cars typically account for 40% of Japanese sales, so this downturn is further evidence that Abenomics has run into the sand. And with government debt/person now $100k, more tax rises seem inevitable
- Russia is again the world’s worst-performing auto market, with sales down 40%. Mercedes is the best performing brand, with sales down only 6%, whilst Lada, Hyundai and Kia are down between 14% – 22%. The other top 10 brands are down by over 50%.
- Brazil sales were down 19%, with April seeing a worsening trend as sales fell 25%. The market should, of course, be doing very well in the run-up to the Olympics next year, but instead the economy has gone into recession as China’s downturn impacts its previously buoyant commodity exports. In addition, the Petrobras corruption scandal continues to throw a shadow over the government.
- India remains the only relatively bright spot, with sales up 8%. But as Team-BHP comment “Going forward, Auto CEOs are a bit cautious, as the rural outlook isn’t bright. 2-wheeler sales are the best indicator of the rural market, and they’ve been nothing to write home about in April.” And, of course, as I noted yesterday, India’s car market has been going nowhere for 4 years, so it is hard to be too optimistic about the outlook.