GoAutoLogo
MENU

News - General News - Sales

Lower interest rates should give dealers a smile

Forecourt fortune: Economic growth has experienced a slow-down but it's a green-light Australia's car dealers.

Leading economist sees better times for car dealers despite anaemic economic growth

General News logo21 Oct 2013

By IAN PORTER

UPDATED 9:00PMAUSTRALIA’S economic outlook for the next year is for moderately weak growth, but that should not hold back the nation’s car dealers, according to Deloitte Access Economics.

In an interview with GoAuto which coincided with the release today of DAE’s latest ‘Business Outlook’, Deloitte director Chris Richardson said falling interest rates should also help offset the effect of rising unemployment, at least in the retail sector.

And that other devil that has tormented Australian car-makers and manufacturing generally – the exchange rate – is also moving in the right direction for the industry, with a projected fall in the value of the Australian dollar over the medium-term to US80c by 2017.

“When I think auto, I think two drivers: interest rates and exchange rates,” Mr Richardson said.

“Exchange rates because it tells you how much of the demand will go to local producers versus imports, and interest rates because so many cars are bought on credit.”

Mr Richardson said dealers should be happy about the Reserve Bank’s latest rate cuts, and said he expected the banks to push rates down further of their own volition in coming months.

“Interest rates are an undeniable positive for the auto market,” he said.

“Everybody, whether you are linked to imports or domestic production, can draw a big smiley face on the Reserve Bank. That’s the good news.”

What’s more, Mr Richardson said dealers and car buyers can expect a further easing in rates, even without another move by the Reserve Bank.

This is because the banks were forced to widen the gap between the RBA cash rate and their lending rates after the global financial crisis because the wholesale lenders to the banks were demanding a bigger risk premium.

“Those stresses are easing,” Mr Richardson said. “I mean the gap between mortgage rates and the cash rate is a function of the GFC, and crisis is not a permanent state of affairs.

“As things gradually get better, that gap won’t go back to where it was in 2007, but it will improve from here.”

Although rates are on the slide, they did combine with the unfavourable exchange rate for a period to put an awful squeeze on the local car-makers.

“In manufacturing, of course it has been a dog of a decade,” Mr Richardson said.

“Interest rates and exchange rates are part of the developing good news, by and large, for the auto sector. But for the better part of a decade they were the ‘deadly duo’.

“They were terrible for manufacturing, they were terrible for auto. But they were also terrible for Victoria and New South Wales, for South Australia and Tasmania, and farmers and tourism operators and international educational operators attracting foreign students.

“There is no denying that the car industry has done it tougher than most groups, but the seeds have already been sown for a narrowing in the two-speed gaps in the Australian economy by sector and by state.”

Happily, as with the interest rates, the exchange rate has also shown some improvement in recent times.

“The bad news of recent years, the exchange rate, is becoming less bad,” he said.

“And that’s a point Deloitte has been trying to make in its automotive industry analysis, that the swing in the exchange rate that we have seen to date is already good news for auto (manufacturing) in Australia.

“We think there is more to come. The Australian dollar is where it is today because of the US shutdown risks, but in 2014 the new head of the US Federal Reserve, Janet Yellen, will wind back the emergency measures, the printing of money.

“Other things equal, that will send the US dollar up and the Australian dollar down.

“(There are) no guarantees on timing and amount, but by 2017 we have the Australian dollar at US80c against the US dollar.

“By definition, that is too late to save Ford.

“It doesn’t say the headwinds go, but it does say that there’s actually a bunch of things that get better.”

Mr Richardson said the overall economic outlook was for “below trend” growth, principally because the huge investment in new mining projects in recent years – involving the better part of a trillion dollars – has started tapering off.

However, a few of the “big guns” in economic growth were finally pointing in the right direction.

He said that despite the fall in mining investment, there are many other positives – especially higher exports, but also lower imports and a dose of better news on retail and house building – that the overall pace of economic growth will not be much below trend.

“However, below trend is still the bottom line, and that is where we’ll stay through to late 2015,” he said.

Deloitte Access Economics’ outlook for your State:NSW wasn’t a big beneficiary of the resources boom, but it is lapping up lower interest rates and a more moderate $A, while NSW’s portfolio of industries also look better suited to the sectoral growth drivers (interest rates will help house building, exchange rates will help manufacturing) of the next two decades.

Victoria still has the lead of a high $A in its saddlebags, but it has less to fear from the coming “construction cliff” (in the mining sector) than do Western Australia and Queensland, while the abolition of the carbon tax would be good news for Victoria, a state with a bunch of heavy emitters.

Queensland is through the worst of its cocktail of coal- and state-sector cutbacks, leaving gas development as its key driver of the moment. Yet this too shall pass and, despite a big export dividend, it will be vital for interest rates to get some action going in retail and house building.

The two-speed economy that has bedevilled South Australia for so long is starting to become less of a drag on its prospects. Yet although the drivers of growth are shifting, that shift may have come too late to stave off further job losses on SA’s manufacturing sector.

Western Australia’s growth is still magnificent. Yet that can’t last. Although the current spend on construction is huge, there simply isn’t further growth in those dollars waiting in the wings. Costs are still too high for the State to be particularly competitive in landing big new projects.

Tasmania has been on the wrong side of Australia’s two-speed economy in recent years, but the $A is already off its peaks, and it could fall further, while interest rates are at historic lows. Even so, the State’s growth looks likely to stay stuck in the slow lane for a while longer yet.

Relative to the size of its economy, the value of engineering construction work underway in the Northern territory is simply massive: it is larger than that for WA and Queensland. Even better, today’s construction surge will last longer than in those other States.

Canberra is “one big mortgage belt”, and that’s been great news for the Australian Capital Territory’s economy. Yet it is even more true to characterize Canberra as a “one-company town”, meaning that public sector cutbacks – Labor’s recent ones and the Coalition’s new ones – will hurt ACT growth.

Read more

Click to share

Click below to follow us on
Facebook or Twitter

General News articles

Motor industry news

GoAutoNews is Australia’s number one automotive industry journal covering the latest news, future and new model releases, market trends, industry personnel movements, and international events.

Catch up on all of the latest industry news with this week's edition of GoAutoNews
Click here