Motor industry is key global indicator

I wrote on Wednesday about the prospects for the non-financial corporates, and highlighted the significance of the US corporation GE, which recently panicked the stock markets by reporting figures way below expectations. I said that GE had long been regarded as a “bellwether” for the global economy.

It occurred to me after writing that, while I knew what the word meant – a significant lead indicator to future events – I did not know its derivation.

But a quick glance at Wikipedia informed me that it came from the ancient farming practice of tying a bell round the neck of a castrated ram (otherwise known as a “wether”) to lead a herd of sheep.

The sheep followed the ram, while the bell told the shepherd where the herd was heading.

A neat analogy for the world of business – a crowd of bleating quadrupeds following a less-than-whole leader while the man in charge strains his ears for a tinkling sound that will inform him the herd is about to walk over a cliff. It is a quite appropriate simile for the financial markets since the sub-prime crisis.

I can see too why GE should be regarded as a bellwether for world business. Its activities straddle all the major sectors from finance to manufacturing, so it is a picture in microcosm of the global economy. However, I believe there is a better one, which also tells us of the state of health of world commerce, but also relates it specifically to the Gulf region – the motor car industry.

The motor trade tells us about manufacturing, raw material and commodity costs, labour costs and discretionary consumer spending. It also correlates closely to the oil price, and tracks international consumer demand and changing taste, especially in a more environmentally-aware world. The purchase of a new car is one of those life-changing events, like buying a house or a taking a luxurious holiday, that reflects lifestyle and individual self-perception.

A more appropriate bellwether you could not imagine, and especially for the Middle East. The rising oil price has funded the creation of a huge infrastructure expansion plan in all the countries of the region, but especially the more economically advanced Gulf, which has centred on the motor car as its principle means of transport. Subsidised domestic petrol sales have made the motor car the only sensible choice for personal transport.

One glance at the worldwide motor industry confirms how accurately it reflects the condition of the global economy. Recently General Motors, the biggest American motor manufacturer, announced the biggest ever loss in US corporate history – a huge $39 billion (Dh143bn) deficit – due to falling demand for its products in the face of foreign competition, a massive bill for pensions for its workforce, and losses in its finance subsidiary. That just about sums up the US economy to me.

Pan across the Atlantic to Europe, and there are ominous signs of gloom in the car business there. Britain has sold its motor industry to foreign manufacturers, so it doesn’t really count as a producer any more, but among the EU countries that have experienced a 10 per cent fall in new car registrations in the first quarter. All the big volume manufacturers report a slow down in sales as consumers postpone the big event, and manufacturers wonder what new environmental requirements will be imposed on them. Only in eastern Europe there any sign of health, and this will not compensate for the shortfall in the West.

Globally, apart from eastern Europe, only China and India are experiencing an increase in motor sales, reflecting the booming economies of those areas.

And – of course – the Middle East. GM might be facing a challenge in its American homeland, but here it could not be healthier. Overall sales rose six per cent, while in the UAE, Oman and Bahrain there were 30 per cent plus rises. Apparently Gulf customers just love those big gas-guzzling SUVs that have gone out of fashion in the United States. BMW and Mercedes point to similar growth.

It all goes to prove that the motor industry is a key indicator for global economic well-being, and that the Gulf is so far escaping the effects of the world-wide recession.