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Germany's vehicle rebound may be stung by trade tensions, China's slowdown

An employee fixing exhaust cables on a Volkswagen Tiguan SUV. Volkswagen says the impact of trade tensions on sentiment in China will pose challenges for the remainder of the year.


THE car industry is steering the German economy again.

Automotive production should pick up again this quarter after new tests choked output and brought economic growth to a standstill over the summer.

But the strength of the rebound - and the year-end economic revival that hinges on it - is in doubt as carmakers feel the pain of trade tensions and China's slowdown.

With Germany accounting for almost one-third of the eurozone economy, its performance also has wider implications. Growth in the 19-nation currency bloc slowed to just 0.2 per cent in the third quarter, the weakest in four years. German data for the period will be published on Nov 14.

The slowdown coincided with updated emissions-test procedures, which hurt sales of new models across Europe, hitting Germany's vehicle sector.

Industrial production shrank in the three months through September, but the Economy Ministry sees an improvement ahead.

In fact, about 440,000 new cars were produced in October compared with 310,000 in August, according to the VDA German carmakers' association.

As a consequence, German growth could bounce back to 0.8 per cent, according to UniCredit's Daniel Vernazza. JPMorgan's Greg Fuzesi and David Mackie told clients to brace for a "big" bounce in industrial production from October onwards.

Others are more prudent. HSBC economists Stefan Schilbe and Rainer Sartoris expect only a "modest recovery" after outright contraction in the third quarter. Their caution chimes with some of the noise from carmakers.

It's not just that the bottleneck from the new tests will take time to clear up. Slower growth in China may sap demand in a vital export market for Germany.

For Volkswagen AG, China accounts for about 40 per cent of global deliveries. It's also the biggest market for the Mercedes-Benz, BMW and Porsche luxury-car brands.

Car-parts producers like Continental AG and Schaeffler AG cited Chinese demand when they reined in their profit outlook recently.

Export orders plunged 13 per cent in October from a year earlier, according to VDA, and production expectation fell.

For now, executives are still projecting confidence. Volkswagen chief financial officer Frank Witter said October sales will still feel the pinch but should rebound after that.

Daimler AG's CFO Bodo Uebber made similar comments. But that hangs on the assumption that China will stabilise demand after five months of dwindling sales - and possibly even introduce tax cuts for car buyers. Volkswagen's sales director Christian Dahlheim said the impact of trade tensions on sentiment in China "will pose challenges for the remainder of the year".

Continental warned last Thursday that a deeper downturn would threaten its revenue projections.

"Looking at the external factors, the automotive industry is under pressure from various perspectives," said Stefan Wolf, CEO of auto-part manufacturer ElringKlinger AG. That includes "the risk of a market decline in China which, as you know, is the major and biggest automotive market in the world". BLOOMBERG

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