OUTPUT, SUPPLY AND LABOUR MARKET DEVELOPMENTS

From a value added perspective, the euro area recovery was initially stronger in the industrial sector, while growth in the services sector remained subdued. However, the services sector gained momentum in 2010, contributing a similar amount to total value added growth to that of the industrial sector on a quarterly basis. Value added in the construction sector remained subdued, with some volatility due to temporary weather-related effects in the fi rst and second quarters of 2010. Total value added increased by 0.3% in the third quarter of 2010, compared with a growth rate of 0.8% in the previous quarter. Notwithstanding the recent increases, more than half of the losses in value added from the recession persist, as value added has increased by only 2.3% since the trough in activity in the second quarter of 2009. Survey data suggest a further increase in value added in the fourth quarter of 2010.

Labour market conditions have stabilised in the euro area (see the labour market section below).

After a strong deterioration in 2009, both employment growth and the unemployment rate have remained fairly stable since the beginning of the year.

SECTORAL OUTPUT

After fi ve consecutive quarters of negative growth, value added in industry (excluding construction) started increasing in the third quarter of 2009 and grew by 0.1%, quarter on quarter, in the third quarter of 2010, after 2.0% in the previous quarter. Industrial production increased in all the main sectors, in particular the capital goods industry (see Chart 49). However, all industrial groupings showed lower growth rates in the third quarter of 2010 than in the previous quarter. Despite increasing continuously over the last fi ve quarters, value added in industry (excluding construction) has recovered less than half of the output loss incurred during the recession. Capacity utilisation rates increased in October compared with July, according to the European Commission’s survey. The reported increase in limits to production stemming from the supply side is a sign of an improvement in industrial activity in the summer, while insuffi cient demand, though declining from July to October, is still reported as being at a high level. The lower growth rate in the industrial sector in the third quarter of 2010 could be partly related to car production, which recovered rapidly up to mid-2010, reaching levels well above aggregate car sales. As a result, car production is expected to have been more subdued in the third quarter of 2010 (see also the box entitled “Developments in the euro area and global car industries”).

Box 5

DEVELOPMENTS IN THE EURO AREA AND GLOBAL CAR INDUSTRIES

Although car purchases only constitute a small proportion of private consumption (around 5% in the euro area) the overall automotive sector – which includes supplying industries, dealerships, etc. – plays a much greater role in explaining overall value added. Thus, car sales and production have followed business cycle fl uctuations as measured by aggregate demand reasonably closely in the past. Recently, however, this link between car purchases and growth has been distorted as a result of various fi scal incentive schemes geared towards car purchases which have been (or still are) in place in a number of countries both inside and outside the euro area. Against this background, this box reviews recent developments in the purchasing and production of vehicles in the euro area, as well as at the global level.

Car sales at the euro area and global level

In 2008 and 2009 the automotive industry, like many other sectors, was signifi cantly affected by the global fi nancial crisis. Indeed, global vehicle sales plunged almost 25% from their peak in April 2008 to their trough in January 2009 (see Chart A) as global fi nancing conditions tightened, household net worth dropped, uncertainty soared and labour markets deteriorated. Although the United States was initially at the centre of this collapse, other countries, including those in the euro area, were also affected by the global downturn. In January 2009 sales in the euro area, as measured by new passenger car registrations, stood more than 25% below their most recent peak in April 2008 (see Chart B), i.e. in line with the global picture.¹

1 Sales of commercial vehicles, which are not elaborated upon further in this box, were even more affected by the global downturn.

Chart A Global vehicle sales and production

(thousands of units; monthly data)

2005 2006 2007 2008 2009 2010 production

sales

3,000 3,500 4,000 4,500 5,000 5,500 6,000

3,000 3,500 4,000 4,500 5,000 5,500 6,000

Sources: Haver Analytics, CEIC and ECB calculations.

Note: The latest observations refer to September 2010.

Chart B New passenger car registrations and manufacture of motor vehicles in the euro area

(index: 2007 = 100; monthly data)

50 60 70 80 90 100 110

50 60 70 80 90 100 110

2005 2006 2007 2008 2009 2010

new passenger car registrations manufacture of motor vehicles

Sources: ACEA and Eurostat.

Note: The latest observation for new passenger car registrations refers to October 2010, while production refers to September 2010.

Output, demand and the labour market

This triggered major repercussions for global industrial production due to global supply chain linkages, as car production represents an important part of industrial production in many countries. In response, the car industry has been at the heart of widespread government support, through vehicle scrappage schemes and massive government bailouts in some countries.

As a result of these support measures, sales recovered rapidly in the euro area and globally.

A split between advanced and emerging markets shows the same picture (see Chart C).

However, while car sales are already above pre-crisis levels in emerging market economies, they remain more subdued in advanced economies.²

Production of motor vehicles at the euro area and global level

Some interesting insights are also to be found when comparing demand for cars with

production.³ Production responded with some delay to the downturn in demand in 2008 at the global level, as well as in the euro area. However, global supply was cut back and, by early 2009, the level of production was already much lower than a year earlier. Production growth remained below that of sales, suggesting that massive de-stocking took place during this period. In the euro area, the difference between production and passenger car registrations cannot be directly translated into inventory movements, as a large proportion of production in the euro area is geared towards exports. Nonetheless, this picture of de-stocking is confi rmed by global developments and anecdotal evidence, as well as the fact that credit constraints during the downturn forced companies to reduce stocks in order to raise liquidity and maintain cash fl ow.

As a result of the support programmes and the associated rise in car sales, car production soon increased. Indeed, as shown in Chart A, although production fell sharply below actual sales in early 2009 (resulting in inventory depletion), it has since recovered rapidly, currently standing at levels well above aggregate car sales. In mid-2010 global car production was almost 10% higher than global car sales.⁴ Similarly, production in the euro area has also shown a rapid increase since 2009, a development that is largely attributable to global demand, particularly from emerging markets.

2 For more information, see the European Automobile Manufacturers’ Association (ACEA) website at http://www.acea.be/index.

php and the box entitled “The effects of vehicle scrapping schemes across euro area countries” in the October 2009 issue of the Monthly Bulletin.

3 The production series for the euro area includes motor vehicles, trailers and semi-trailers, and is thus not fully comparable with new passenger car registrations.

4 This analysis is not possible for the euro area, as production is published in the form of an index.

Chart C Car sales in advanced and emerging market economies

(thousands of units; monthly data)

1,000 1,500 2,000 2,500 3,000 3,500 4,000

1,000 1,500 2,000 2,500 3,000 3,500 4,000

2005 2006 2007 2008 2009 2010 advanced economies

emerging market economies

Sources: Haver Analytics, CEIC and ECB calculations.

Note: The latest observations refer to September 2010.

Looking ahead, industrial new orders received, which should subsequently appear in production, increased further in the third quarter of 2010, but at a lower growth rate than in the previous quarter. Moreover, business surveys suggest that growth in the industrial sector remained positive at the beginning of the fourth quarter of 2010 (see Chart 50). The PMI output index for the euro area manufacturing sector increased in October and November. It now stands close to the level observed in the third quarter, and is indicating positive growth rates. Confi dence in the manufacturing sector increased further in October and November, according to the European Commission Business Survey.

Short-term outlook

In the euro area, the pattern of rising car sales and contracting GDP that was observed for 2009 as a whole is likely to have reversed in 2010. While GDP is expected to continue to recover, car purchases have been declining, refl ecting the withdrawal of the fi scal incentive schemes.

Car registrations in the euro area are estimated to decline by some 10% in 2010 (using data up to October 2010), following a rise of over 3% in 2009. GDP, on the other hand, is expected to increase by between 1.6% and 1.8% (according to the latest Eurosystem staff sales) following a contraction of 4.1% in 2009. Looking ahead, recent developments in car sales, both in the euro area and in other advanced economies, tend to point to a stabilisation in the coming months, while car sales in emerging markets are expected to remain strong.

Chart 49 Industrial production growth and