Europe's GDP and the Auto Sector Woes

The decline in US, UK and EMU GDP growth is all occurring at once. Yr/Yr GDP growth is in a slowing down mode with the slowing at a rather severe pace. We can see that the degree of slowdown and the low pace of growth are both comparable to the decelerations in 2000-2001. At that time the decelerating came from a higher pace of growth to start with.

While the US is being made the ‘poster boy of the downturn’ in terms of being the cause of this recession, the data show us that the persisting sharp slowing in growth began in EMU as its currency rose above level that growth in that region could tolerate.. The decline in the UK growth rate came later and has been synchronous with the decline in the US growth but UK growth has fallen harder- from a higher initial pace.

The US suffered worse in the earlier cycle, around the year 2000, as its growth dropped from an above European pace to a below European pace at the trough. But the US economy subsequently had a recovery phase that was quite robust pushing US growth above the growth rates in EMU and the UK from 2003 – 2006. Then US growth began to get erratic. But the ongoing cyclical weakness in the US did not start again until nearly four quarters after EMU’s GDP began to make its ongoing turn for the worse at the of 2006. EMU Yr/Yr growth peaked late in 2006 at 3.3% and has since then been steadily eroding.

Right now the UK, EMU and the US (Japan, and many others, too) are engulfed n a synchronous downturn. And it has begun to create tensions.

In the US, the automakers are in trouble as unit auto sales slipped to just above a 10mu unit rate last month an extremely low pace that implies crushing overhead costs from fixed business charges. . With a huge number of jobs linked to the auto sector, the US is concerned that GM, Ford and Chrysler are in such straights. And with a bailout plan that has been used to help financial firms there is now a clamoring in the US to help the auto makers. But in Europe auto sales are weak too; there sales have fallen for six months running. The European Commission warned it would contest any U.S. bailout for the sector that broke state aid rules. Insurers in Europe have withdrawn credit protection for auto suppliers that protected them in the event of bankruptcies of the US auto makers. Asian and European automakers are feeling the pinch but still are not in the desperate circumstances that US car makers face.

The EU Threat

"We are in the process of analyzing the <US> plan. The plan has not yet been presented yet. Of course, if it is illegal state aid, we will act at a WTO level," Commission President Jose Manuel Barroso has said. So the lines are drawn. The risk is protectionism and its ability to create a deep downward spiral since it is hard to imagine that the US would let a European protest stand in the way of supporting the automakers. And if the US did that the Europeans surely would gain some WTO sanctioned recourse to retaliate and that is how the mess gets out of hand.

So yes, economies are weak. Financial sectors are strained. Central banks are cutting rates. There have been some assistance plans. In the US where import penetration is the most freely allowed, the US automakers are feeling the pinch. As US lawmakers argue about remedies for the ‘Big Three’ European’s plan a surprise attack of their own through WTO. If you think the only risk here is the economic downturn and the financial sector, you are fooling yourself.