Onmonetary policies, theFederal Reservehas moved itsdiscount rate from 5.75 to 0.5 between the dates of August 2008andDecember2009.The US car market being very dependent on car credits to finance buyers,this lowering of Discount Rate aims toincrease the monetary supply and liberate credit for consumption,this measure even though in the right direction, is still lacking of significant positive effect on the sales of cars.
Auto industry on the US
The big three US automakers have received a double punch this past years, one from foreign competition and another from the economic downturn. Asian car makers have been steadily gaining market share with their sexier, efficient, and dependable cars. Asian cars are more in tune with the actual world requirements of smaller efficient cars, and most US car makers are still depending on the sale of pickup trucks, vans, and big sedans. The economic down turn has also drastically decreased the sales of cars in the US, 35.1 decrease to August 2009 and estimated for 2009 to be below 9.7 million (in comparison with 17 million five years ago). Today, consumers have less disposable income, are looking for more fuel-efficient cars, and also have changed their consumption habits because of the uncertainty of the economy.
The White House has demonstrated a clear disposition to help this endangered US industry by putting into action the following economic policies
1) Investment in Bankrupt US Automobile manufacturers, on expectations that if this were not done, the losses would be greater. The Government stake in these companies came with big restructuring.
General Motors the Government took a stake of 61 in the company through bankruptcy court in August 09. Forced to make a sale of bad assets and troubled brands Hummer, Saab, Saturn, and Pontiac keeping only Cadillac, Chevrolet, Buick, and GMC brands. GM stopped working with 1,124 dealers in order to lower distribution costs and make the remaining dealers more profitable. They were able to reach an agreement with the union to lay off 21,000 workers, thus lowering labor costs by 2.4 billion by 2014.
Chrysler After filing Chapter 11 Bankruptcy, they have forged an alliance with Italian automaker FIAT to bring technology of smaller and more efficient cars into Chrysler product line. The deal was to create a new company called Chrysler Group LLC (Fiat has 20 stake, with option to increase to 35 and to 51 in further), and to transfer most of old Chrysler assets to it. The federal government financed the deal with US6.6 billion in financing.
2) An incentive for consumers to buy new cars named Cash for Clunkers, a 1 billion program signed by President Obama. Consumers who trade in an old vehicle that began with gas mileage below 18 mpg and can get up to 4,500 in government vouchers for buying another truck that gets 2 mpg more than the trade-in. However as the program proved to have high response and the government added an additional 2 billion to it, a couple of criticisms arose
The first one was that the government is enticing citizens to purchase new cars that they normally would not be able to afford. It might be that many of the consumers enticed into buying a new car do not have an income adequate for this kind of purchase. The government might be financing a new wave of consumer loan default.
A second criticism is that the program will not necessarily impact the domestic auto industry as 4 out of the five most popular cars being purchased under Cash for Clunkers are foreign. The domestic US auto industry might not enjoy the fruits of this program however on a wider microeconomic scale other manufacturers will probably enjoy it.
The sum of the above macroeconomic policies have a devaluating effect on the dollar which has a positive side effect in promoting export of US cars. As dollar value against other currencies falls, US products become more competitive on the global market. As a result incentives for export and des-incentive for imports take place.
A second side to the effects of the bailout concerns the fact that the US governments fiscal and budget deficits are recording the highest in history. Criticisms towards the plan wonder where the money for the stimulus package should come from. This is what the US public and the other countries around the world are most skeptical and concerned about. Currently, printing more dollars is the only choice left to the US government and this will certainly lead to a big depreciation of the dollar. For those countries holding large amount of dollar assets, dollar devaluation simply means disaster. In a financial crisis however a government can increase its purchases with little concern over the crowding out effect. Injecting money to the economy is a reasonable method in that case because the chances of it creating a multiplier effect and stimulating the economy are much higher.
Auto industry in Russia
The Russian car market dropped by 51 from over 3 million cars in the end of 2008, severe drop in sales and manufacturing is a direct result in cuts of credits to consumers and rising unemployment. Government, however, struggled to save automotive industry of the country in several ways. AvtoVAZ, the biggest Russian car manufacturer, has received bailouts twice (12 and 54 billion rubles) and was urged to step forward to closer relations with French Renault to produce more efficient and higher quality production. Consumers were offered highly-beneficial credits (8.6 to be paid by the government) for smaller cars for the period over Dec. 2011. Higher import duty was introduced in early 2009 for second-hand cars to hit Japanese and German used cars import in Russia, and to urge consumers to buy cars assembled in the country. Despite harsh conditions and severe drop in figures, VW, GM, Nissan and Hyundai are building and increasing their manufacturing presence in Russia.
Effects of financial crisis 2007-2010 on automotive industry
There are two major reasons for crisis in automotive industry
1. High fuel prices, dependent on high oil prices, discouraged many consumers from buying SUVs and pick-ups, so popular in America and some other parts of the world. And popularity and relatively high profit margins of these vehicles had encouraged the American Big Three automakers, General Motors, Ford, and Chrysler to make them their primary focus in North America. By 2008 fuel prices reached their maximum of 150 USD per barrel and higher, and the problem was already very obvious.
2. Another reason for the crisis is credit crunch as a result of problems with banks and financial crisis itself. It not only led to problems with procurement of raw materials due to lack of cash flow, but also indicated lack of credits for consumers, who were used to purchase cars for credit.
Main change due to high oil prices change of focus in car range production for many manufacturers to more fuel-efficient, more eco-friendly technologies. Rapid development of alternative propulsion cars
2009 was viewed as a serious challenge to car industry across the world, and governments in most countries made preparations and took needed measures to save the market, because its crisis affects social stability many thousands of workers from automotive and related industries may suffer from cars sales drop it also affects all the supply chain from raw materials to car sales companies.
Credit crunch and financial crisis itself also led to lack of disposable income, access to loans and consumers confidence level, which severely affected demand for new cars.
So, many car companies got support from their governments, also shifted their focus to new trend in the industry, and from another side governments started consumer support programs to sustain or even increase car sales.
The main threat was and is a dropping demand for cars, and companies along with their countries governments struggle to push that demand up with different measures, because if it will not break even at least, consequences will be disastrous.
Many manufacturing plants will be closed and workers fired, which means rapid and unprecedented growth of unemployment rate - social crisis GDP will go down with production (Auto industry is 10 of GDP in the US).
Many affiliated industries (car parts manufacturers for OE and aftermarket) will be affected by lowered car production numbers, and it will also lead to shrinking of these industries - same
In 2008 sales dropped by 37 globally.
In 2007 world automotive industry production volumes were estimated at the level of 72 million cars, in 2008 that number was slightly smaller 71 million.
Auto makers forge new alliances, because it will give them three benefits
1. Access to more funds
2. Access to new technologies
3. Access to new markets
In 2009 sales of new cars varied from market to market
1. Members of the European Union mostly succeeded to sustain sales on previous year level (13.5 million cars in Western Europe, German market up for 23), thanks to
10 Companies used price cutting measures to attract customers.
20 They played eco card alternative propulsion and eco-friendlier technologies.
30 Government issued subsidies to companies and to consumers to boost sales.
40 New global car manufacturers alliances were forged Porsche-VW, which also intends to buy Suzuki, FIAT-Chrysler, Peugeot-Citroen is planning to buy Mitsubishi to have more financial power, share technologies, enter new markets.
2. US market went down by 21 in 2009(in 2 years drop has reached 35), before 2009 US car market was the biggest in the world, now it is outrun by China, major measures to fight crisis were
10 Bailout for GM and Chrysler
i. GM has received a huge bailout to fight crisis and underwent Chapter 11 Bankruptcy (restructuring) - GM is temporarily majority owned by the United States Treasury and to a smaller extent the Canadian government, with the US government investing a total of US57.6 billion under the Troubled Asset Relief Program. Pontiac, Saturn, Oldsmobile brands were terminated, Hummer was sold to a Chinese company, SAAB brand is still in negotiations with Dutch Spyker and in case of failed deal it will be terminated. GMC, Chevrolet, Cadillac and OpelVauxhall will be core brands of the company.
ii. After filing Chapter 11 Bankruptcy, Chrysler has forged alliance with Italian automaker FIAT to bring technology of smaller and more efficient cars into Chrysler product line. The deal was to create a new company Chryser Group LLC (Fiat has 20 stake, with option to increase to 35 and to 51 in further), and to transfer most of old Chrysler assets to it. The federal government financed the deal with US6.6 billion in financing.
20 Due to wide sales and manufacturing net in the world, well developed eco-friendly and efficient technologies, Ford has done well in the crisis without bailout plans. However, talks about selling Volvo brand to Chinese manufacturer are still present.
30 Consumers enjoyed some incentives while buying the new car, which has influenced positively the last months sales in the US.
3. Russian car market dropped by 51 from more than 3 million cars in 2008, when it overcame German market. Severe drop in sales and manufacturing is a direct result in cuts of credits to consumers and rising unemployment. Government, however, struggled to save automotive industry of the country
10 AvtoVAZ, biggest Russian car manufacturer, has received bailouts twice (12 and 54 billion rubles) and was urged to step forward to closer relations with French Renault to produce more efficient and higher quality production.
20 IzhAuto has filed bankruptcy and is still inactive.
30 Consumers were offered highly-beneficial credits (8, 6 will be paid by the government) for smaller cars for the period over Dec. 2011.
40higher import duty was introduced in early 2009 for second-hand cars to hit Japanese and German used cars import in Russia and to urge the consumer to buy cars assembled in the country.
5. Despite harsh conditions and severe drop in figures, VW, GM, Nissan and Hyundai are building and increasing their manufacturing presence in Russia.
4. Chinese car market has surprised everybody in the world in 2009 it rose from 9.35 million in 2008 to more than 13 million cars, overcoming US market. Chinese government used many attraction measures, as consumer incentive and car tax drop, to stimulate car sales, which were more than successful. Another remarkable issue is that Chinese market features development of plenty alternative propulsion cars, aiming higher efficiency and eco-friendliness.
5. Brazil is highly protected by import taxes, and lots of foreign manufacturers assemble their cars in Brazil, reaching 3 million cars produced in the country in 2007. In crisis Brazilian car market succeeded in growing by 11.4 compared to 2008 - due to government tax breaks and high consumer confidence level.
So, even with recent sales going up in most markets due to effect of incentive policies, experts say sales may slow down again in developed countries, and proceed growing in China, Brazil, and India.
Macroeconomic policies which are actually used to deal with the economic recession caused by the financial crisis
Following individual national policies failure eradicate the financial crisis and its effects on the real economy, the world leaders have met in Washington in November 2008 and in London in April 2009 to take a certain number of concerted macroeconomic measures. They have committed and implemented urgently and simultaneously the following measures
Fiscal policies Governments have used fiscal policies to stimulate domestic demand to rapid effect, as appropriate, while the objective is to maintain a policy framework conducive to fiscal sustainability
Monetary policies Central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and they have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability. Other macroeconomic measures concerned financial regulations and supervision and world trade stimulus.
The financial regulation and supervision was intended to strengthen the financial system by putting in place a better and more credible system of surveillance and regulation to take account of macro-prudential risks.
As for the international trade policy, the world leaders agreed not to resort to protectionism and to reinvigorate world trade and investment that is essential for restoring global growth.
Globally, the implementation of all these macroeconomic policies should ultimately
1restores confidence, growth, and jobs
2. Repair the financial system to restore lending
3.Strengthen financial regulation to rebuild trust
4.Fund and reform international financial institutions to overcome this crisis and prevent future ones
5. Promote global trade and investment and reject protectionism, to underpin prosperity and
6. Build an inclusive, green, and sustainable recovery.
Use economic analysis tools to explain effects of these macroeconomic policies on economic indicators such as GDP and CPI
Auto industry contributes to 10 of US GDP.
Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.
The most remarkable macroeconomic policy adopted by the US government to face the financial crisis is a
bailout plan consisting mainly on the purchase of mortgage-related assets by the US government. The approximate cost of this bailout plan is USD700,000,000,000.
By adopting this macroeconomic policy the US GDP component that will be significantly affected is the government purchases (G) since the USD700,000,000,000 investment is included within the same.
Moreover, this USD700,000,000,000 expense will become public debt hence its payment will significantly reduce the US GDP since the money used to cover such debt will exit US economy, reducing the cash flow within the Country.
The US government also implemented a Tax Policy whereby the tax cuts offer 400 to individuals making less than 75,000 and 800 to married coupes making less than 150,000 per year.
A third policy adopted by US government was the reduction of the Federal Reserve rate from 5.75 to 0.5 between August 2008 and December 2009.
Components of the GDP
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
The components of GDP (which is denoted in the equation by Y) are consumption (C), investment (I), government purchases (G), and net exports (NX).
Y C I G NX
Explain the macro-economics policy effects in every GDP variable
(C) Consumption is the spending by households on goods (durable and nondurable) and services. The aforementioned macroeconomic policies affect the consumption in different ways, while the Tax Policy and the Monetary Policy aim to encourage consumers to spend their disposable income and increase the cash flow respectively, the bailout plan will contract the whole economy, hence, the consumption will be reduced as well.
(I) Investment is the purchase of goods that will be used in the future to produce more goods and services. The outcome of the implemented policies regarding the investment will be the same as the consumption, since is only the nature and purpose of the acquired goods what differs from consumption.
Furthermore if the economy is slowing down, possibly entering a recession, the bearer of the bad news will often be an undesired accumulation of inventories. As consumers reduce their purchases, sales of goods and services slow, inventories build up, and firms slash production (laying off employees) to reduce unwanted (and costly) inventories.
(G) Government Purchases include the spending on goods and services by local, state, and federal governments. This component will be the most affected by the bailout plan since the money invested in the same will become public debt.
(NX) Net Exports equal the purchase of domestically produced goods by foreigners (export) minus the domestic purchases of foreign goods (imports). If the economy contracts the goods produced within the Country will be considerably less that those foreign products entering the market, hence the NX component would be reduced as well.
CPI
Introduction
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the third quarter, 0.1 percentage point less than the second estimate this index increased 0.5 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.3 percent in the third quarter, compared with an increase of 0.8 percent in the second.
Consumer Price Index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. It is also the most accurate measure for inflation.
Explain the effects of macro-economic policies on the CPI
Foreign governments supplied funds by purchasing US Treasury bonds and thus avoided much of the direct impact of the crisis. On the other hand in the microeconomic field, US households used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities.
As a result of the public debt and the reduction of cash flow, the Country will not have the same purchasing power, hence the provision of good and services will be less provoking the raise of product and services prices, and hence the increase in the CPI.
The overall result of the aforementioned is a contraction of the whole economy. The CPI has been considered for most of the countries as an important indicator of the economys functioning, therefore, the increase in the CPI will be a clear indicator of the US financial situation due to the economic crisis.
Since November 2008 the US Federal Reserve has implemented some macroeconomic measures to aid the US economy recover from the global recession, this measures may have helped reduce the impact as well as aid the US automakers in fighting this economic downturn.
On Fiscal policies the US government has benefitedmiddleand lower-income households with Federal tax cuts as part of the787 billion stimulus planin early 2009.The US automobile industry has been benefited with this tax cut because it leaves the benefited households with more disposable spending money which may be used towards the purchase of new vehicles.
OnMonetary policies, theFederal Reservehas moved itsdiscount rate from 5.75 to 0.5 between the dates of August 2008andDecember2009.The US car market being very dependent on car credits to finance buyers,this lowering of Discount Rate aims toincrease the monetary supply and liberate credit for consumption,this measure even though was in the right direction, it is still lacking of significant positive effect on the sales of cars.
It is still early to clearly determent where the auto industry will stand in the future. Automobile manufacturers around the world are still reporting significant losses. In December 2009 the US government has allocated a third bailout budget to be invested in G.M. Furthermore, Toyota, considered to be the worlds healthiest car manufacturer, has formally requested a bridge loan of 2 billion following a 40 decline in sales in its biggest market the US. The world is entering 2010 with its auto industry still suffering from the ongoing recession.
Despite the government funds it received which has being invested in developing new low fuel consuming cars, GM has still reported a 1.2 billion loss in last years third quarter. The shrinkage of the auto market has created new goals for its recovery President Obama has stated that he envisions a much smaller G.M that might not exceed selling 10 million cars a year and will enjoy a much smaller market share. On November 16th, one month before the third bailout has been authorized, GM announced that it has stabilized enough so that it could take a symbolic step and return some of the loans provided by the government.
For the time being it seems as though the crisis has been stabled and is not as harsh as the first half of 2009 has been. In a global scale it seems that almost all of the auto manufacturers are still encountering the same problems. With an over capacity that was established with high margins of leverage, the worldwide demand of only 50 million cars each year have lead to massive losses and constant requests for bailouts. However not all countries have experienced as many difficulties and there are positive exceptions that should be mentioned as well
Chinese car market has surprised everybody in the world when in 2009 it rose from 9.35 million in 2008 to more than 13 million cars, overcoming the US market. Chinese government used many attraction measures, as consumer incentive and car tax drop, to stimulate car sales, which were more than successful. Another remarkable issue is that the Chinese market features development of plenty alternative propulsion cars, aiming higher efficiency and eco-friendliness.
Brazil is highly protected by import taxes, and lots of foreign manufacturers assemble their cars in Brazil, reaching 3 million cars produced in the country in 2007. In crisis Brazilian car market succeeded in growing by 11.4 compared to 2008 - due to government tax breaks and high consumer confidence level.