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Europe's Sluggish Auto Market Faces Long Road to Recovery

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Car sales in Europe declined around 60% year over year in May. However, this marked an improvement from April’s 76% plunge. While easing of lockdown restrictions and the subsequent reopening of dealerships perked up sales a bit, the overall forecast for the year still remains bleak. LMC Automotive expects sales for the year to sink 26% to 10.58 million units. Last year’s volumes are unlikely to be surpassed until 2023.

Vehicle Sales Fall in May But Improve From April Levels

New car registrations in Italy fell 49.6% year over year in May. However, the decline was less than the 97.5% year-over-year drop in the previous month. In Germany, just more than 168,000 cars were registered. While this marks a 49.5% year-over-year drop, it compares favorably with the 61.1% plunge in April. Car registrations in Spain tanked 73% year over year in May, marking an improvement from the prior month when sales sank 96.5%. In France, sales of cars and SUVs plummeted 50.3% year over year, comparing favorably with April’s 89% fall. Auto sales in Britain and Sweden declined 89% and 50% year over year, respectively, in May.

With all major auto biggies including Volkswagen (VWAGY - Free Report) , BMW AG (BAMXF - Free Report) , Fiat Chrysler (FCAU - Free Report) , Daimler (DDAIF - Free Report) and Renault SA (RNLSY - Free Report) having kept dealerships and plants in Europe shuttered during most of March and April, production and sales have gone for a toss. Even upon the gradual restart of activities in May, the demand for vehicles remains low.

Economic Crisis in Europe to Weigh Further on Auto Sales

According to Organization Economic Co-operation and Development (“OECD”), the European Union faces an unprecedented economic downturn triggered by the coronavirus pandemic. Per OECD latest reports, a second wave of the virus this autumn could shrink the economy by 15% by the end of the year. Lockdown measures to contain the pandemic’s spread has resulted in a major recession and a second pandemic wave can contract the GDP by 11.5% in 2020, with unemployment rates being more than 12% by year-end. Eurozone countries, including France, Italy and Spain, are expected to take a severe hit. Per the report, GDP of France and Italy is expected to decline 11.4-14.1% and 11.3-14%, respectively. The same in Spain and Germany could contract 11.1-14.4% and 6.6%, respectively. Britain’s economy is likely to suffer the worst damage from the coronavirus crisis, according to the OECD. Amid serious worries over economic recession in major markets of Europe, customers are likely to put off discretionary purchases like cars.

Brace for a Bumpy Road

While factories have been restarted with new safety and hygiene measures, it is just the first step to recovery. A return to pre-pandemic production rates will take much longer than it took for the market to crash. Depressed demand for vehicles amid a weak economy and falling consumer sentiment will weigh on sales, going forward. As it is, Europe is heading toward a material tightening of carbon emissions in 2020 and 2021. A switch to electro mobility will require high capital investments, which will further strain the financials of automakers.

As the industry is fighting tough CO2 rules and consumers are worrying about a recession, automakers in Europe are having a tough time. Industrial watchdogs expect significant fall in European auto sales in the coming months. The sales decline will make it an uphill task for the industry to generate the funds needed for the technological change to tackle climate crisis. While France and Germany have unveiled their aid package, the stimuli mainly emphasises on green vehicles and excludes general cash incentives for ICE vehicles. European carmakers like Volkswagen and BMW have already warned a difficult year ahead on concerns about sustained economic impacts.While Volkswagen currently carries a Zacks Rank #3 (Hold), BMW holds a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Automotive experts are voicing concerns that the struggling car industry of Europe is not likely to regain lost ground even when the coronavirus pandemic ends and automakers may well have to navigate through several quarters of recession.

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