Pub. 13 2014-2015 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 15 new jersey auto retailer W W W . N J C A R . O R G to name. The def lationary threat is very real and China will need to continue to actively manage the downward trend in growth. This is a difficult task for any nation, let alone one where nearly half of GDP is investment in infrastructure, real estate, and other capital. While Chinese gross domestic product (GDP) is forecast to grow at 6.8% in 2015 and slow to 6.1% in 2016, this remains a rapid decelera- tion for an economy that was growing at nearly 8.0% a year through 2013. A more serious slowdown is not out of the question, with growing signs of stress for heavily indebted provincial governments. Keeping a watchful eye on China will be critical in 2015. Directly tied to this Chinese slowdown are the commodity exporting countries of Latin America and Africa. Brazil is stuck in stagf lation, hampered further by rapidly decreasing demand for com- modities from China. The same holds true for much of Africa where Nigeria and South Africa are both dependent on oil and mineral exports. Mature markets will also not escape unscathed, but due more to political mis- management than economic fundamen- tals. Japan’s struggles with def lation are not over and, while it has exited a minor recession, the economy there remains fragile with consumers continuing to choose to save far more than they are willing to spend. Japan’s central bank has embarked on a path of quantitative easing, much like the Federal Reserve did in the U.S. Japan’s problems are more endemic and jump starting that economy will be difficult in our view. We forecast Japanese GDP growth of just 0.7% in 2015. One beneficiary of both chronic def lation and the new policies from the Bank of Japan are exporters. We expect profits to rise at Toyota, Honda, and the rest of the Japanese manufacturers and for their products to be more competitive thanks to a weak yen. The Eurozone also suffers from con- strained consumer demand and high government debt levels. There is a clear division in Europe between slow growth, heavily indebted countries like Greece, Spain or Portugal and Germany or Hol- land. This will continue to dominate EU politics and, with slowing demand from China, likely impact German growth. One benefit will be continued weakness in the Euro versus the U.S. dollar, which will make German products much more competitive in the U.S. and, much like Japanese manufacturers, improve content on vehicles and pricing competitiveness. While globally the economic outlook remains muted, our primary market of the United States is set to expand. Our view is that the U.S. economy will be the revving engine of global growth in 2015. Our forecast is for GDP to grow by 3.1%, with light vehicle sales set to reach 16.94 million units. We are extremely optimis- tic that the Fed will hold off on raising rates till at least this summer given the extremely weak inf lationary numbers. Indeed, in our opinion, the Fed should hold off raising rates until 2016, but that is very unlikely. There is a chance that rising rates will negatively impact the housing market, which remains remarkably fragile outside of the east and west coast markets. But we believe that the Fed rate increases will be very slow and well-advertised, thus allow- ing bond and mortgage markets, as well as retail consumers, to slowly adjust to a new reality of rising rates. Our forecast is for the Fed Funds rate to rise to an av- erage of 0.37% in 2015 with the ten year treasury averaging 2.88%. Rates will rise further and likely faster in 2016. Our forecast is very positive, so what are the big negatives (that is what keeps us up at night) are two major economic concerns. A sudden contraction in China that spreads financial panic beyond China’s borders is a distinct possibility. China’s economy is unbalanced and shifting from a low wage investment-led economy to a high wage consumer-driven economy that is fraught with pitfalls and risks. This won’t be any easy path. Second is a domestic U.S. concern, the lack of rising real wages and incomes. This, of course, directly affects motor vehicle sales. We need to see some increase in wages and incomes if motor vehicle sales growth and overall economic growth are going to accelerate. Flat wages in 2015 will constrain sales and growth in the future. What message do we conclude with? Well, be glad you are selling cars in the U.S. and not China, Japan, or Europe, but also that growth is poised to move higher. There are numerous strong fundamentals in the U.S. economy that are finally co- alescing into what should be one of the best years since the recession. Steve Szakaly is the Chief Economist at NADA. He can be reached at sszakaly@nada.org. Be glad you are selling cars in the U.S. and not China, Japan, or Europe, but also that growth is poised to move higher. There are numerous strong fundamentals in the U.S. economy that are finally coalescing into what should be one of the best years since the recession.