Cars are driving us into recession

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Photo by Christian Petersen/Getty Images

  • More than 7 million Americans have gone into “serious delinquency” on their car loans.
  • The automobile industries of the US and Europe have – for different reasons – started to show symptoms of something more serious happening in the Western economies.
  • In Europe, many people have simply stopped buying cars.

LONDON – More than 7 million Americans have gone into “serious delinquency” on their car loans, according to the Federal Reserve Bank of New York, and that is one of the reasons the US Fed has become more cautious about raising interest rates.

In fact, the automobile industries of the US and Europe have – for different reasons – started to show symptoms of something serious happening in the underlying Western economies. Europe is flirting with recession, and many people here have simply stopped buying cars. In America, danger signals from auto-loan debt suggest US consumers don’t feel as though they’re enjoying the best of times.

Both factors suggest many consumers feel their finances are no longer robust enough to handle big-ticket purchases.

Read more: The shock surge in US car-loan delinquencies gives a clue why the Fed is treading carefully, even in a booming economy

First, in the US, an increasing number of Americans have apparently become too poor to continue paying for the cars they drive. Ninety-day past-due delinquencies among 18- to 29-year-olds are already at the same level they were in 2008, during the financial crisis:

Screenshot 2019 02 14 at 12.03.40

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New York Fed

Now look at what has happened in the eurozone, the 19 European countries that use the euro currency:

EZ car regs cap econ

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Capital Economics

What is happening in Europe is complicated and not directly correlated to auto-loan debt. But it’s having the same effect: People have reduced car-buying by as much as 10%, and that’s threatening to tip Europe into recession. Here’s a chart showing new car registrations in the four largest eurozone countries, from Pantheon Macronomics:

New cars

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Pantheon Macroeconomics

In Germany – the world’s fourth-largest economy and Europe’s driving manufacturing force – new-car buying fell off a cliff in the past few months.

germany cars

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UBS

Economists have more recently been cheered by an uptick in sales, but they are still rising from a steep trough and are well below the level they were at a year ago:

Germany car buying Screenshot 2019 02 14 at 11.36.54

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Pantheon Macroeconomics

Disastrous auto sales are one of the major factors in hurting the German economy, which went into a technical recession in the third quarter of 2018 and appears to have stagnated, with exactly 0.0% growth, in Q4 2018:

Germany GDP

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Pantheon Macroeconomics

Britain has problems too. This shows new-car registrations in the UK:

UK car sales

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Pantheon Macroeconomics

Since 2017, British consumers seem to have permanently shaved about 10 percentage points off their demand for new cars.

The German and British car markets are closely linked. Unsurprisingly, Brexit – especially if Britain leaves the European Union with no trade deal – will hurt both of them. Oxford Economics estimated that “no deal” would cut 0.3 percentage points from Europe’s manufacturing economy but up to 0.7 points from the car industries.

“Particularly vulnerable would be the German and Spanish industries, with output falling 0.6 ppt and 0.8 ppt below baseline over the same period,” the Oxford analyst Stephen Foreman told clients recently.

EZ car output Screenshot 2019 02 14 at 11.41.28

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Oxford Economics

A variety of factors are affecting car-buying in Europe. The fake-diesel-testing scandal has deterred people from buying new diesel models. Makers have had to retool their plants to cope with new so-called WLTP regulations designed to improve emissions and fuel-consumption standards, and that has reduced production. There is some anecdotal evidence that the popularity of ride-hailing apps like Uber has reduced people’s desire to replace their private cars. And in Britain, a change in vehicle tax ramped up sales in 2017, thus depressing them afterwards.

But all that, coupled with the US delinquent-debt problem, has had tangible macro results: