Auto breakdown in Germany?

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The engine of Germany’s economy in recent decades has undoubtedly been the dominance of its car-makers. But with the sector now facing deep structural change, could the eurozone’s growth baton be handed on to France?

Germany’s car exports have been something of a global economic phenomenon. In 2018 alone, and despite the diesel emissions scandal, four million German-made vehicles were sold to overseas markets, helping to cement the country’s status as the eurozone’s number-one economy. But now, with the switch to electric creating a seismic shift for car-makers, the bonanza could well be over. This is a powerful example of environmental and sustainable issues having an impact that is felt at the macro level.

The likes of Mercedes, BMW, Audi and Volkswagen now face two fundamental problems. The first is profitability. The battery for a new electric family car is expected to comprise around 30 percent of its value — and batteries are not made in Germany. For small cars, that share is even higher. The second is that this share of value-add is taking place in a shrinking market. Demand for cars has been falling in developed economies and the boost from China is fading.

US consumers are spending but not on autos

Source: HSBC and BMO Global Asset Management, as at April 2019

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Look over the border to France, however, and the electric car revolution is likely to have far less of an impact. France doesn’t export many cars and what it does make are small and relatively low cost.

In the growth stakes, France has been catching up in recent quarters and Germany’s car-selling challenges could allow it to ultimately move ahead. The pro-business agenda of President Macron is starting to gain traction and, behind the fog of the Yellow Vest movement, important reforms are being made that will make the French labor market more flexible and competitive.

Weekly rioting in Paris may not be the best advertisement for political stability but it has forced Macron to cut taxes and, with a weakened opposition, he is free to push ahead with his major reform program. Chancellor Merkel, by contrast, faces tensions in her coalition that are hindering fiscal expansion, notably in the much-vaunted ‘Green New Deal’.

Germany has lost its competitive advantage over the rest of the euro bloc

Source: Berenberg, European Commission, 10-Sep-19. Nominal unit labour costs indexed at 2005=100.

Germany’s golden decade began with major reforms in the early 2000s, which improved competitiveness and facilitated a big increase in the labor force. But the price of success has been widespread labor shortages and a rise in wages relative to the rest of the euro bloc, which has eroded and reversed those gains in competitiveness.

Much will depend on how Germany responds to the contraction in the auto sector, not to mention the challenges faced by the chemicals and plastics industries. Yet it’s more than possible that we are seeing the beginnings of the catch up of France and some of the previously distressed nations of the eurozone periphery.

France’s potential

Source: Berenberg, Eurostat 10-Sep-19

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