16/1/2013: Irish Car Sales and German Exports Declines

Latest data from Ireland on new vehicles purchases is quite revealing of the broader problems faced by the German economy - a snapshot of what happens to exporting engine when demand in its trading partners slumps.

Let's run through some numbers.

• Overall demand for new vehicles in Ireland has fallen off the cliff in recent years. In 2007 we imported 180,754 new private cars, of which 54,703 came from Germany. Of all German cars imported, 17,394 came from 'luxury' carmakers (Audi, BMW, Mercedes and Porsche). In 2012 we imported 76,256 cars, or 57.8% down on the peak. Of the cars we did import, German automakers accounted for 23,529 vehicles, with German 'luxury' carmakers selling 8,728 vehicles here. 
• In summary, 2007-2012 changes in cars imports were -57.8% for all vehicles, -30.3% for Audi, -51.8% for BMW, -65.8% for Mercedes, - 69.1% for Opel, -84.5% for Porsche and -53.5% for Volkswagen.
• Between 2007-2011, due to aggressive sales promotions and due to skew to the income distribution in Ireland (preserving higher-range incomes more than mid-range), German car makers have managed to increase their share in the overall Irish market, with all German manufacturers' combined market share rising from 30.3% in 2007 to 30.9% in 2012, and 'luxury' makers' share rising from 9.6% in 2007 to 11.4% in 2012.

Nonetheless, there is huge opportunity cost of Irish recession to German automakers. Let's make some assumptions and estimate this cost:

1. Since 2000 and 2007 represent two peak years in terms of cars demand pre-crisis, dropping them from consideration, let's take an annual average demand for 2001-2006 as the 'old normal'. This amounts to 157,261 annual vehicles sales in total, of which 12,814 vehicles sales should accrue annually to German premium car makers and 41,166 sales to all German car makers.
2. Using the above average, we can estimate cumulative sales losses over 2009-2012 as 326,515 total vehicles not sold by all car makers, 75,626 vehicles not sold by all German carmakers and 20,863 vehicles not sold by German 'luxury' or premium car makers.
3. Assume that, on average, a new vehicle in Ireland sells for EUR22,500 per vehicle, inclusive of taxes, while an average 'premium' German vehicle retails for EUR42,500 opera vehicle, average non-premium German vehicle retails for EUR22,500-27,000 range, while Porsche sells an average vehicle for EUR70,000.
4. Based on (3) we have foregone / opportunity cost in EUR terms of cumulated EUR7,347mln for all motor trade (EUR1,837mln annual average) over 2009-2012. Of this, EUR2,275mln opportunity cost carried by all German car makers (EUR569mln annually on average), and of the latter EUR919mln cumulative (EUR230mln annual average) of the opportunity cost carried by German 'luxury' or premium car makers.

Now, let's put this into Euro-wide perspective. Obviously not all economies have experienced as dramatic collapse in sales of new cars as Ireland. But majority of economies did experience a fall-off. Given that Ireland accounts for under 2% of the euro area economy, and assuming that on average, euro area decline in sales was running at 1/10the rate of Irish market decline, German automakers should be some EUR3,100-3,200mln out of pocket on gross sales, annually, on average since 2009-2010.

The above of course is a crude calculation, as it disregards the issue of profit margins, which have probably shrunk, as car advertising had to accelerate in order to support sales. One example would be Audi, which has managed to increase its sales in the Irish market in 2012 compared to 2011 - the only German premium car makers who has managed to do this - on foot of very aggressive advertising campaigns. In addition, sales promotions and discounts, as well as sales of more smaller and less luxury models and fit-outs have also most likely contributed to lower profit margins. 

Here are some charts to illustrate the above.

11/3/2012: Did Global Financial Integration Contribute to Global Financial Crisis Intensity?

An interesting paper (link here) from Andrew Rose titled International Financial Integration and Crisis Intensity (ADBI Working Paper 341 ).

The study looked at the causes of the 2008–2009 financial crisis "together with its manifestations", using a Multiple Indicator Multiple Cause (MIMIC) model that allows for simultaneous causality effects across a number of variables.

The analysis is conducted on a cross-section of 85 economies. The study focuses "on international financial linkages that may have both allowed the crisis to spread across economies, and/or provided insurance. The model of the cross-economy incidence of the crisis combines 2008–2009 changes in real gross domestic product (GDP), the stock market, economy credit ratings, and the exchange rate. The key domestic determinants of crisis incidence that [considered] are taken from the literature, and are measured in 2006: real GDP per capita; the degree of credit market regulation; and the current account, measured as a fraction of GDP. Above and beyond these three national sources of crisis vulnerability, [Rose added] a number of measures of both multilateral and bilateral financial linkages to investigate the effects of international financial integration on crisis incidence."

The study covers three questions:

• First, did the degree of an economy’s multilateral financial integration help explain its crisis? 
• Second, what about the strength of its bilateral financial ties with the United States and the key Asian economics of the People’s Republic of China, Japan, and the Republic of Korea? 
• Third, did the presence of a bilateral swap line with the Federal Reserve affect the intensity of an economy’s crisis? 

"I find that neither multilateral financial integration nor the existence of a Fed swap line is correlated with the cross-economy incidence of the crisis. [Pretty damming for those who argue that the crisis was caused / exacerbated by 'global' nature of the financial markets and for those who claim that 'local' finance is more stable. Also shows that the Fed did not appeared to have subsidized european and other banks, but instead acted to protect domestic (US) markets functioning.] There is mild evidence that economies with stronger bilateral financial ties to the United States (but not the large Asian economies) experienced milder crises. [This is pretty interesting since so many European leaders have gone on the record blaming the US for causing crises in European banking, while the evidence suggests that there is the evidence to the contrary. Furthermore, the above shows that we must treat with caution the argument that all geographic diversification is good and that, specifically, increasing trade & investment links with large Asian economies - most notably China - is a panacea for financial sector crisis cycles.]"

Core conclusion: "more financially integrated economies do not seem to have suffered more during the most serious macroeconomic crisis in decades. This strengthens the case for international financial integration; if the costs of international financial integration were not great during the Great Recession, when could we ever expect them to be larger?"

Here's a snapshot of top 50 countries by the crisis impact:

Quite thought provoking. One caveat - data covers periods outside Sovereign Debt crisis period of 2010-present and the study can benefit from expanded data coverage, imo.